United States
Securities And Exchange Commission
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-8061
Diamond Hill Funds
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(Exact name of registrant as specified in charter)
375 North Front Street, Suite 300, Columbus, Ohio 43215
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(Address of principal executive offices) (Zip code)
James F. Laird, 375 North Front Street, Suite 300, Columbus, Ohio 43215
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(Name and address of agent for service)
Registrant's telephone number, including area code: (614) 255-3333
Date of fiscal year end: 12/31
Date of reporting period: 12/31/04
Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. ss. 3507.
Item 1. Reports to Stockholders.
DIAMOND HILL
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funds
ANNUAL REPORT
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December 31, 2004
SMALL CAP FUND
LARGE CAP FUND
FOCUS LONG-SHORT FUND
BANK & FINANCIAL FUND
STRATEGIC INCOME FUND
SHORT TERM FIXED INCOME FUND
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Not FDIC Insured
May Lose Value | No Bank Buarantee
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This material must be preceded or accompanied by a current prospectus.
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Table of Contents
Letter to Shareholders 1
Mission Statement, Pledge, and Fundamental Principles 3
Special Investment Letter - Inverted Thinking Leads Us to Stock-Picking 5
Management Discussion of Fund Performance
Diamond Hill Small Cap Fund 8
Diamond Hill Large Cap Fund 10
Diamond Hill Focus Long-Short Fund 12
Diamond Hill Bank & Financial Fund 14
Diamond Hill Strategic Income Fund 17
Diamond Hill Short Term Fixed Income Fund 19
Financial Statements
Schedules of Investments 21
Statements of Assets & Liabilities 31
Statements of Operations 32
Statements of Changes in Net Assets 33
Schedule of Capital Share Transactions 36
Financial Highlights 37
Notes to Financial Statements 42
Report of Independent Registered Public Accounting Firm 46
Other Items 47
Schedule of Shareholder Expenses 48
Management of the Trust 49
CAUTIONARY STATEMENT
At Diamond Hill, we pledge that,"we will communicate with our clients about our
investment performance in a manner that will allow them to properly assess
whether we are deserving of their trust." Our views and opinions regarding the
investment prospects of our portfolio holdings and Funds are "forward looking
statements" which may or may not be accurate over the long term. While we
believe we have a reasonable basis for our opinions, actual results may differ
materially from those we anticipate. Information provided in this report should
not be considered a recommendation to purchase or sell any particular security.
You can identify forward looking statements by words like "believe," "expect,"
"anticipate," or similar expressions when discussing prospects for particular
portfolio holdings and/or one of the Funds. We cannot assure future results. You
should not place undue reliance on forward-looking statements, which speak only
as of the date of this report. We disclaim any obligation to update or alter any
forward-looking statements, whether as a result of new information, future
events, or otherwise. This material is not authorized for distribution to
prospective investors unless preceded or accompanied by a Prospectus. Please
read the Prospectus carefully for a discussion of fees, expenses, and risks.
Current performance may be lower or higher than that quoted herein. You may
obtain a current copy of the Prospectus or more current performance information
by calling 1-888-226-5595 or at Diamond Hill's website (www.diamond-hill.com).
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Letter to Shareholders
Dear fellow shareholders:
We are pleased to provide this year-end update for the Diamond Hill Funds. We
appreciate the confidence that you have placed in us, and assure you that we are
constantly guided by our fiduciary duties to you.
The following table summarizes the performance of the Diamond Hill Class A
shares relative to their benchmarks for 2004 and longer periods:
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Total Return
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Three Six One Three Five
Months Months Year Years Years
12/31/04 Ended Ended Ended Ended Ended Since Inception
Fund Name NAV 12/31/04 12/31/04 12/31/04 12/31/2004 12/31/2004 Inception Date
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Small Cap Fund (DHSCX) $21.41 12.54% 17.02% 29.26% 21.23% NA 22.24% 12/29/00
Russell 2000 14.09% 10.83% 18.33% 11.48% 9.13%
Large Cap Fund (DHLAX) $12.51 9.19% 11.92% 21.12% 8.19% NA 7.18% 6/29/01
Russell 1000 9.80% 7.81% 11.40% 4.27% 1.87%
Focus Long-Short Fund (DIAMX) $13.67 4.18% 10.56% 16.86% 8.77% NA 7.69% 6/30/00
Russell 3000 10.16% 8.07% 11.95% 4.80% -1.57%
Bank & Financial Fund (BANCX) $19.10 7.27% 10.73% 16.67% 22.55% 20.89% 14.90% 8/1/97
S&P Supercomposite Financials(A) 8.32% 9.08% 11.92% 8.28% 7.31% 7.40%
NASDAQ Bank Index 8.84% 11.92% 13.67% 17.38% 16.47% 11.19%
Strategic Income Fund (DSIAX) $11.63 2.98% 8.26% 7.46% NA NA 14.44% 9/30/02
Merril Lynch Domestic Master Index 0.96% 4.20% 4.34% 4.47%
Short Term Fixed Income Fund (DHFAX) $9.94 0.46% 1.54% 2.04% NA NA 2.67% 6/28/02
Merrill Lynch 1-3 Yr Corp
Govt Bond Index 0.10% 1.23% 1.21% 3.01%
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Source: Diamond Hill Funds, Bloomberg LP and Frank Russell Company
Returns are shown without sales charges but include all other expenses.
(A) Returns for the S&P Supercomposite Financials are price change only before
November 29, 2001 and total return thereafter.
Equity Funds and Markets
2004 was a terrific year for our Funds. All four of our equity mutual funds
substantially outpaced their respective benchmarks and ranked highly in their
Lipper and Morningstar categories. While each year is an important link in the
performance record, we are most concerned with long-term performance. With each
passing year, the magnifying lens pulls back from short-term results, allowing
the longer track record to come into focus. With the appreciation in 2004, all
our equity funds have achieved meaningful positive real returns since their
respective inception dates, a claim that cannot be made by some of the
market-weighted indices. We attribute this success to our willingness to deviate
from the benchmarks, and apply our price-sensitive investment discipline.
As always, our focus is on future performance. We still believe investors in
U.S. equity markets should be prepared for lower real returns over the coming
decade than what has occurred historically. In our opinion, this is not a
tragedy given the fantastic performance of stocks from 1982-1999. Our view is
based in part on low current dividend yields and uncertainty regarding the
opportunity for corporate profits to meaningfully outstrip nominal GDP growth
through margin expansion, given the already current high levels of corporate
profits as a percentage of GDP. Additionally, if inflationary factors were to
push up long-term interest rates, current earnings multiples could come under
pressure. As always, we will try to add value to your portfolio by following the
same intrinsic value discipline that has served us well in the past.
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Diamond Hill Funds Annual Report December 31, 2004 Page 1
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Fixed Income Funds and Markets
Coming into 2004, we expected the Fed to shift focus from the passing threat of
deflation to the possible reemergence of inflation, and begin to remove the
level of accommodation in monetary policy. The Fed did in fact begin this
process, and the Fed Funds target increased in 2004 from 1% to 2.25%. Our
expectation was for the yield curve to flatten, but at a level for long rates
somewhat higher than at the beginning of the year. The yield curve did flatten,
but the 10-year Treasury ended the year at 4.22%, virtually unchanged from the
beginning of the year. Corporate balance sheets continue to improve, as GDP and
corporate profits grew impressively during the year. Credit spreads narrowed,
adding an additional boost to corporate bond returns.
Our goal for the Strategic Income Fund is to outpace inflation by 2-3% per
annum. We have been able to easily exceed that in the past, and this will remain
our goal in the future when measured over long time frames. Our goal for the
Short Term Fixed Income Fund is capital preservation, which is accomplished by
returns matching or outstripping inflation.
Thank you again for your trust in Diamond Hill Funds. As always, we will work
hard to continue to earn it. Best wishes for 2005.
/s/ R.H. Dillon
R.H. Dillon, CFA
Chief Investment Officer
/s/ Charles S. Bath
Charles S. Bath, CFA
Managing Director - Equities
/s/ Kent A. Rinker
Kent A. Rinker
Managing Director - Fixed Income
/s/ Christopher M. Bingaman
Christopher M. Bingaman, CFA
Portfolio Manager
/s/ Richard Moore
Richard Moore, CFA
Portfolio Manager
/s/ Thomas P. Schindler
Thomas P. Schindler, CFA
Portfolio Manager
/s/ William Zo
William Zox, CFA, J.D., LL.M.
Portfolio Manager
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Page 2 Diamond Hill Funds Annual Report December 31, 2004
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Mission Statement, Pledge
and Fundamental Principles
Mission
The mission of Diamond Hill is to achieve superior investment performance and
provide exceptional service to our clients.
Pledge
Consistent with our mission, we make the following pledge to all of our clients:
Our investment discipline is to assess the economics of the underlying business,
its management, and the price that must be paid to own a piece of it. We seek to
concentrate our investments in businesses that are available at prices below
intrinsic value and are managed or controlled by trustworthy and capable people.
Benjamin Graham pioneered this discipline during the 1930s and many others have
practiced it with great success ever since, most notably Warren Buffett.
We will communicate with our clients about our investment performance in a
manner that will allow them to properly assess whether we are deserving of their
trust.
Our investment team will be comprised of people with integrity, sound experience
and education, in combination with a strong work ethic and independence of
thought. Especially important is that each possesses the highest level of
character, business ethics and professionalism.
Our employees will enjoy a working environment that supports professional and
personal growth, thereby enhancing employee satisfaction, the productivity of
the firm and the experience of our clients.
We will invest the capital that you entrust to us with the same care that we
invest our own capital. To this end, Diamond Hill employees are significant
investors in the same portfolios in which our clients invest, and are
collectively the largest shareholders in the Diamond Hill Funds. In addition,
all Diamond Hill employees are subject to a Code of Ethics, which states that
all equity investments must be made in a Diamond Hill fund, unless approved by
our compliance committee.
Fundamental Principles - Equity
o Every share of stock has an intrinsic value that is independent of its
current stock market price. We believe that we can determine a reasonable
approximation of that intrinsic value in some cases. At any point in time,
the stock market price may be either significantly higher or lower than
intrinsic value.
o Over short periods of time, as evidenced by extreme stock market
volatility, the stock market price is heavily influenced by the emotions
of market participants, which are far more difficult to predict than
intrinsic value. While stock market prices may experience extreme
fluctuations on a particular day, we believe intrinsic value is far less
volatile.
o Over sufficiently long periods of time, five years and longer, the stock
market price tends to revert to intrinsic value.
o We concentrate our investments in businesses whose per share intrinsic
value is likely to grow. To achieve this, we assess the underlying
economics of the businesses in which we invest and the industries and
markets in which they participate. We seek to invest in businesses that
possess a competitive advantage and significant growth prospects as well
as outstanding managers and employees.
o We only invest in a business when the stock market price is lower than our
conservative assessment of per share intrinsic value. In addition, every
business in which we invest is "handicapped" by its price. While we would
prefer to own only great businesses with superior managers, there are very
few businesses that satisfy those criteria and additionally are available
at attractive prices. As a result, we may invest in less attractive
businesses at more than attractive prices. Depending on the price that we
pay, our returns from less than ideal businesses may be even better than
our returns from ideal businesses.
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Diamond Hill Funds Annual Report December 31, 2004 Page 3
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o In estimating intrinsic value, we use an interdisciplinary approach. Not
only do we perform financial modeling including discounted cash flow,
private market value, and leveraged buyout analyses, we draw from other
areas we believe are relevant to our investment decision-making. These
include economics, statistics and probability theory, politics,
psychology, and consumer behavior. In short, we do not want to exclude
from our thinking anything that can help us forecast future cash flows,
our most important as well as most difficult job.
o We intend to achieve our return from both the closing of the gap between
our purchase price and intrinsic value and the growth in per share
intrinsic value.
o We do not define risk by price volatility. We define risk as the
possibility that we are unable to obtain the return of the capital that we
invest as well as a reasonable return on that capital when we need the
capital for other purposes. If you will need the capital that you entrust
to us in less than five years, then you should not invest that capital in
the stock market.
Fundamental Principles - Fixed Income
o Our objective is to generate a fair income return in relation to the
credit and interest rate risks borne.
o We balance our income objective with a focus on total return. When the
market offers an attractive opportunity for capital appreciation, we will
invest for capital appreciation in addition to income. When the market is
overvalued, we will invest for a fair income return and preservation of
capital.
o A flexible approach allows us to search for value in income-generating
securities issued by investment grade and non-investment grade
corporations as well as the U.S. government and its agencies.
o We invest in that portion of the capital structure that offers the most
value including secured, senior unsecured, and subordinated securities as
well as preferred and equity securities.
o We focus on credit risk, interest rate risk, liquidity risk, call and
prepayment risk, and other risks when analyzing income-generating
securities. We evaluate the compensation that we receive for bearing
various risks and invest when that compensation is attractive in relation
to the risks borne.
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Page 4 Diamond Hill Funds Annual Report December 31, 2004
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Special Investment Letter -
"Inverted Thinking Leads Us To Stock-Picking"
The efficient market theory suggests that while investors are not
clairvoyant, they are rational, informed, and unbiased. Based on these
conditions, one can expect that the current stock price is the best
estimate of the true value for a security. However, studies in behavioral
finance confirm that these assumptions frequently do not coincide with
reality. Furthermore, a recent book gives a different set of
organizational criteria that must be present in order for a group, such as
the investors that form the stock market as a whole, to make wise
decisions. We have never ascribed to the efficient market theory in its
stronger forms. We believe there are select opportunities to add value
through active investing.
Life can only be understood backwards, but it must be lived
forwards.
-Soren Kierkegaard
The great mathematician Carl Jacobi, after a long struggle with a problem,
changed his approach and soon found his answer. Having seen the power of this
thought process, he often advised, "when in trouble, invert, always invert." One
commencement speaker picked up on this mental trick, and told the graduating
class how to have a miserable life. For instance, he advised that if they wanted
to be unsuccessful, they should never try to learn from great thinkers that have
come before; they should try to discover everything themselves. The audience
soon understood the types of behavior the speaker believed they should avoid,
and were easily able to invert, and "back into" the types of behavior he
believed would prove rewarding in life. Jacobi's mental habit of thinking
problems through forward and backward should be useful for everyone.
The Efficient Market Theory Stated
In the 1960s, building on the work of Harry Markowitz and others, Eugene Fama
proposed the efficient market theory. Since competition in the stock market is
so intense, "rational profit maximizers" will quickly impound new information
into stock prices such that, at any point in time, the market price is the
single best estimate of the value of an enterprise. Because news arrives
randomly, stock prices will follow a "random walk." Investors, therefore, should
utilize an index approach and forgo trying to beat the market. This theory rests
on a circular argument. Only through the efforts of active investors can market
efficiency be expected. But as long as some investors seek opportunities and
bring about efficiency, others can "free ride" and still trust that market
prices are unbiased.
In addition, efficient market theory believed that since investors are
risk-averse, they must receive a premium to reward them for bearing greater risk
(uncertainty). Vast amounts of data have been collected that seemingly support
the efficient market theory. The records of professional managers, on average,
have failed to beat the market. Furthermore, over long periods of time, stocks
have outperformed corporate bonds, which have outperformed government bonds and
inflation, but each has only done so with more volatility.
Here Come the Behavioralists
The ethos of hard science dictates that a theory that has been tested, supported
by evidence, and seems to explain an observed phenomenon be upheld until a
competing theory either disproves the original theory or better explains the
phenomenon. Some researchers, unconvinced by the correctness of the efficient
market theory, began delving on the border between economics and psychology, a
field that came to be termed "behavioral finance." Thinking through the problem
backwards using cleverly designed experiments, they found evidence refuting the
validity of many of the assumptions on which the efficient market theory rests,
and proposed different descriptions of reality. Amos Tversky and Daniel Kahneman
(Kahneman shared the 2002 Nobel Prize in Economics for this work, which Tversky
surely would have shared had he not passed away in 1996) found that people
demonstrate the following:
Loss Aversion - People are not always risk averse. In the realm of losses, they
exhibit risk-seeking behavior. For instance, in experiments, when people were
offered a sure $85,000 or an 85% chance of $100,000 or a 15% chance of receiving
nothing, the majority of respondents chose the sure $85,000 even though each has
the same expected value. This is consistent with risk aversion. But when the
same people were offered the choice between a certain loss of $85,000 and an 85%
chance of losing $100,000 and a 15% chance of losing nothing, the majority chose
the gamble rather than the certain loss, exhibiting risk-seeking behavior. It is
often said that the market hates uncertainty. However, the finding
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Diamond Hill Funds Annual Report December 31, 2004 Page 5
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above recalls Mark Twain's comment "a wife does not so much object to her
husband gambling, she mostly objects to him losing."
Mental Accounting - People tend to organize their decisions in separate mental
accounts. For instance, researchers constructed the following two scenarios:
Scenario 1: You have paid $20 for a play ticket. Upon arriving at the
theatre you discover that you have lost the ticket. Would you pay $20 for
another ticket?
Scenario 2: You have decided to see a play that costs $20 per ticket. Upon
arriving at the theatre you discover that you have lost a $20 bill. Would
you still pay $20 for a ticket?
In one study, only 46% of respondents answered yes in scenario 1, while 88% of
those same respondents answered yes to scenario 2. That people construct "mental
accounts," whereby the account for a theatre ticket is down $20 in scenario 1
but not in scenario 2, is the most likely explanation.
Overconfidence - Numerous studies have shown people are overconfident in their
predictions. Furthermore, predictions often are not well calibrated. For
instance, when people were asked how confident they were in a certain
prediction, respondents who replied 80% or greater were often in error more than
50% of the time. As Herbert Simon declared, humans are only boundedly rational.
Conducting studies involving the U.S. stock market,Werner De Bondt and Richard
Thaler published an article in 1985 entitled "Does the stock market overreact?"
in which they reported findings that stocks that were the subject of recent bad
news were, on average, systematically mispriced as they subsequently
outperformed market averages. "Value" investors jumped on this and other studies
as justification for their investment approach. Other studies looked at positive
earnings "surprises" and relative price strength and concluded the market
under-reacts to good news given these stocks outperformance over a 6-12 month
time frame. Momentum and some quantitative investors hold up these studies to
justify their investment approaches. This might strike some as frustrating and
even further proof of efficient markets - sometimes the market overreacts and
sometimes it under-reacts (not to mention the possibility that the conclusions
in these studies might depend on the time frame over which the analysis was
conducted). From our viewpoint, the findings from behavioral finance do produce
a more complete picture of reality and can be synthesized with the other
findings. Succinctly, we believe that while markets are fairly efficient, they
are far from always efficient.
A Mental Checklist
Thoughts on some of these topics were refreshed after reading The Wisdom of
Crowds:Why the Many are Smarter than the Few and How Collective Wisdom Shapes
Business, Economies, Societies, and Nations by James Surowiecki. The basic
premise of the book is that under the right circumstances, groups are remarkably
intelligent, and are often smarter than the smartest person in them.
Instinctively, most people have trouble accepting this thesis, as unruly mobs
and other mass hysterias readily come to mind. This doubt is acknowledged
upfront in the liner notes to the book, with H.L. Mencken's quote "No one in
this world, so far as I know, has ever lost money by underestimating the
intelligence of the great masses of the plain people." Surowiecki, however,
maintains that Mencken is wrong. He has collected some wonderful examples of
groups making extraordinarily accurate predictions under uncertainty, and
working together to solve problems of cognition, coordination, and cooperation.
He also presents examples of groups making dysfunctional decisions, but is not
necessarily troubled by this, wisely pointing out that this is the way the world
works. What he does propose, however, is that for a crowd to make wise
decisions, it must possess the following characteristics:
o Diverse - because it adds perspectives that would otherwise be
absent and because it takes away, or at least weakens, some of the
destructive characteristics of group decision making such as
groupthink and conformity.
o Independent - because it keeps the mistakes that people make from
being correlated and makes it more likely to have new information
rather than the same data with which everyone is already familiar.
o Decentralized - because it fosters diversity, encourages
independence, and brings specialized knowledge, including what
economist Friedrich Hayek termed tacit knowledge, that knowledge
which cannot be easily summarized or conveyed.
o Aggregation - because some mechanism, such as market prices, must
exist to reflect the thinking of the group as a whole, typically
through averaging.
Just as an airline pilot uses checklists to ensure a safe takeoff, flight, and
landing, we believe this can serve as an effective checklist for an individual
to use to gauge the appropriate level of trust to have in the wisdom of crowds.
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Page 6 Diamond Hill Funds Annual Report December 31, 2004
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The Conceit of Stock-Picking
Referring back to the commencement speaker, being conceited would have made his
list of behaviors to avoid in life. So we acknowledge that there is a certain
conceit in selecting individual stocks and trying to beat the market, and
recognize that outperforming the market, after considering all costs, is a
formidable challenge. We also believe free markets are the best mechanism
available for setting the price of capital and eventually sorting out the truth.
Yet, when we apply Surowiecki's pre-conditions for wise crowds to the stock
market, we remain skeptical of placing complete trust in stock market prices,
and are hesitant to follow a passive index strategy.
Consider the condition of independence. Investors would meet this test if they
independently appraise the value of a business based upon their own expectations
for the future cash flows of the business and a reasonable required return, and
buy or sell only when they spot a compelling investment opportunity. However, if
investors engage in the practice of trying to predict what other investors might
pay in the near future for a given security (in a process that John Maynard
Keynes described as analogous to a beauty contest where the contest winner would
be based not on some objective standard of beauty, but on whose picks most
closely correspond to the average picks of all competitors), prices can become
unhinged from reality. In reality, it is never exclusively one or the other.
However we see signs of the latter reflected in very high turnover portfolios.
Also, we frequently observe managers "closet indexing," by starting with the
current stock price (and by extension the market capitalization) to formulate
portfolio position sizes based on small deviations from the index weight. These
observations curtail our confidence in perfectly efficient markets, and lend us
confidence there will be select opportunities to add value.
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Diamond Hill Funds Annual Report December 31, 2004 Page 7
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Diamond Hill Small Cap Fund
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Performance Update
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Results (Class A) Since Inception*
Since
Year 12/29/00
Ended 12/31/04 Inception
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Diamond Hill Small Cap Fund (DHSCX) 29.26% 22.24%
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Russell 2000 Index 18.33% 9.13%
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* The Fund return excludes any sales charges but includes all other
expenses. Standardized returns are disclosed on the following page.
Results longer than one year are annualized.
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Portfolio Commentary
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[PHOTO]
R.H. Dillon, CFA
Co-Portfolio Manager
[PHOTO]
Thomas P. Schindler, CFA
Co-Portfolio Manager
We are pleased to report a prosperous 2004 in the Diamond Hill Small Cap Fund,
both in an absolute and relative sense. As in 2003, many individual holdings
contributed to this 2004 performance. One sector of the portfolio that
appreciated strongly was energy and energy services. Of the holdings in the
portfolio at the end of last year, Southwestern Energy more than doubled, and
Cimarex and Lufkin Industries appreciated approximately 40%. Positions initiated
early in the year included Berry Petroleum (up 52% from cost), Encore
Acquisition (up 12%), Helmerich & Payne (up 24%), and Tidewater (up 15%). Part
of the main thesis underlying all these holdings is the belief that excess oil
and gas supplies are constrained, leading to the type of commodity price
increases seen throughout the year. While it remains to be seen whether the
commodity prices will attain further highs, we do believe this represents a
sustainable "sea level" change from the energy prices experienced in the 1990s.
Meanwhile, at the time of purchase, we believed embedded in the stock prices
were expectations for far lower commodity prices. While the stock price
appreciation corrects some of the opportunity, we still are attracted to the
fundamentals of this sector. Among other notable contributors were PacifiCare,
Greenbrier, Black & Decker, Brinks, and Steiner Leisure. Most of these positions
have been long held in the Fund, and we continue to compare price and value in
an effort to maintain an attractive portfolio.
The smaller capitalization Russell 2000 has now outperformed the larger
capitalization S&P 500 for six consecutive years (and obviously all four years
during the Fund's existence). With each year, we have become progressively less
confident this small cap out-performance will continue. Now, it appears to us an
even prospect. Having a smaller cap portfolio might not necessarily be a
headwind going forward, but it is unlikely to be a strong tailwind either.
The final notable occurrence in the Fund in 2004 was significant growth in net
assets. At the beginning of the year, the portfolio had nearly $19 million in
assets. That figure was approximately $70 million at year-end. There are pros
and cons to this asset growth for long term shareholders. We will do our best to
balance these factors in the best interests of long-term shareholders.
Thank you again for your interest in the Diamond Hill Small Cap Fund.
/s/ R. H. Dillon
R. H. Dillon, CFA
Portfolio Manager
/s/ Thomas P. Schindler
Thomas P. Schindler, CFA
Portfolio Manager
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Page 8 Diamond Hill Funds Annual Report December 31, 2004
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Growth of $10,000
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Comparison of the Change in Value of a $10,000 Investment in the Diamond Hill
Small Cap Fund - Class A(A) and the Russell 2000 Index
[The following data represents the mountain graph depicted in the printed
material.]
Small Cap Russell
Fund Class A 2000 Index
12/29/00 9,425 10,000
03/31/01 10,217 9,350
06/30/01 12,111 10,686
09/30/01 9,350 8,466
12/31/01 11,822 10,250
03/31/02 13,168 10,658
06/30/02 12,437 9,768
09/30/02 10,071 7,678
12/31/02 10,848 8,151
03/31/03 9,875 7,785
06/30/03 11,977 9,608
09/30/03 14,134 10,479
12/31/03 16,292 12,002
03/31/04 17,381 12,753
06/30/04 18,001 12,813
09/30/04 18,718 12,447
12/31/04 21,064 14,201
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Diamond Hill Small Cap Fund - Class A
Average Annual Total Return(B)
One Year Since Inception(C)
21.80% 20.44%
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(A) The chart above represents the performance of Class A shares only, which
will vary from the performance of Class C shares based on the difference
in charges and fees paid by shareholders in the different classes.
(B) The average annual total returns shown above are adjusted for maximum
applicable sales charge of 5.75%.
(C) Class A shares commenced operations on December 29, 2000.
Past performance is no guarantee of future results.The principal value and
investment return of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
The performance of the above Fund does not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or the redemption of Fund shares.
Tabular Presentation of Schedule of Investments
- --------------------------------------------------------------------------------
The table below provides the Small Cap Fund's sector allocation. We hope it will
be useful to shareholders as it summarizes key information about the Fund's
investments.
Sector Allocation % of Net Assets
- ----------------- ---------------
Consumer Discretionary 21%
Consumer Staples 1%
Energy 14%
Financial 9%
Health Care 4%
Industrial 9%
Information Technology 2%
Materials 10%
Utilities 2%
Cash and Cash Equivalents 28%
------
100%
------
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2004 Page 9
- --------------------------------------------------------------------------------
Diamond Hill Large Cap Fund
- --------------------------------------------------------------------------------
Performance Update
- --------------------------------------------------------------------------------
Results (Class A) Since Inception*
Since
Year 6/29/01
Ended 12/31/04 Inception
- --------------------------------------------------------------------------------
Diamond Hill Large Cap Fund (DHLAX) 21.12% 7.18%
- --------------------------------------------------------------------------------
Russell 1000 Index 11.40% 1.87%
- --------------------------------------------------------------------------------
* The Fund return excludes any sales charges but includes all other
expenses. Standardized returns are disclosed on the following page.
Results longer than one year are annualized.
- --------------------------------------------------------------------------------
Portfolio Commentary
- --------------------------------------------------------------------------------
[PHOTO]
Charles S. Bath, CFA
Portfolio Manager
I am pleased with the results of the Diamond Hill Large Cap Fund in 2004. The
Fund's return of 21.12% exceeded the return on the Russell 1000 index of 11.40%.
The market ended the year on a very strong note and the fourth quarter rally
allowed the market to post a very respectable return for the year.
As 2004 began, I believed the best opportunities in the market remained with the
smaller companies in the Russell 1000 index. That proved to be the case as many
of the portfolios biggest gainers were companies occupying the smaller
capitalization niche of the large capitalization market. An example of such a
company was Pacificare. This managed care healthcare company was one of the
largest holdings in the portfolio and its outsized gains helped the portfolio
outperform the index in 2004.
Throughout 2004, the Fund maintained a large investment in the energy sector.
The outlook toward energy is even more positive at the end of the year and the
portfolio holdings have been increased. At year-end, the energy weighting in the
portfolio was approaching 20%. This large investment was due to the attractive
long-term outlook for the sector. Strong worldwide demand growth combined with
limited capacity growth has led to a tight supply/demand situation. This should
support high energy prices for the foreseeable future. These high prices should
help provide attractive returns for our investments in the energy sector.
A large new holding in the portfolio is Phelps Dodge. This company is the
largest U.S. based copper company. The situation in copper is similar to energy
where large worldwide demand growth is straining capacity and causing prices to
increase. The outlook is for continued high copper prices, which should drive
strong earnings growth for Phelps Dodge. However, the stock price does not
reflect this opportunity. Therefore, it is one of the largest holdings in the
portfolio.
I have continued to avoid technology holdings in the Fund. Their valuations
continue to reflect higher levels of growth and profitability than I think is
achievable. Until valuations adjust, I will not feel compelled to invest in this
portion of the market.
I want to thank shareholders for their continued support. I look forward to
working with you for many more years to come.
/s/ Charles S. Bath
Charles S. Bath, CFA
Managing Director - Equities
and Portfolio Manager
- --------------------------------------------------------------------------------
Page 10 Diamond Hill Funds Annual Report December 31, 2004
- --------------------------------------------------------------------------------
Growth of $10,000
- --------------------------------------------------------------------------------
Comparison of the Change in Value of a $10,000 Investment in the Diamond Hill
Large Cap Fund - Class A(A) and the Russell 1000 Index
[The following data represents the mountain graph depicted in the printed
material.]
Large Cap Russell 1000
Class A Index
06/29/01 9,425 10,000
09/30/01 8,445 8,474
12/31/01 9,490 9,416
03/31/02 9,821 9,485
06/30/02 8,425 8,209
09/30/02 6,934 6,821
12/31/02 7,523 7,378
03/31/03 7,170 7,161
06/30/03 7,919 8,288
09/30/03 8,603 8,537
12/31/03 9,925 9,583
03/31/04 10,299 9,765
06/30/04 10,741 9,902
09/30/04 11,009 9,723
12/31/04 12,021 10,676
-------------------------------------
Diamond Hill Large Cap Fund - Class A
Average Annual Total Return(B)
One Year Since Inception(C)
14.17% 5.39%
-------------------------------------
(A) The chart above represents the performance of Class A shares only, which
will vary from the performance of Class C shares based on the difference
in charges and fees paid by shareholders in the different classes.
(B) The average annual total returns shown above are adjusted for maximum
applicable sales charge of 5.75%.
(C) Class A shares commenced operations on June 29, 2001.
Past performance is no guarantee of future results.The principal value and
investment return of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
The performance of the above Fund does not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or the redemption of Fund shares.
Tabular Presentation of Schedule of Investments
- --------------------------------------------------------------------------------
The table below provides the Large Cap Fund's sector allocation. We hope it will
be useful to shareholders as it summarizes key information about the Fund's
investments.
Sector Allocation % of Net Assets
- ----------------- ---------------
Consumer Discretionary 10%
Consumer Staples 6%
Energy 20%
Financial 10%
Health Care 12%
Industrial 13%
Materials 15%
Utilities 4%
Cash and Cash Equivalents 12%
Other Assets/Liabilities (net) -2%
------
100%
------
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2004 Page 11
- --------------------------------------------------------------------------------
Diamond Hill Focus Long-Short Fund
- --------------------------------------------------------------------------------
Performance Update
- --------------------------------------------------------------------------------
Results (Class A) Since Inception*
Since
Year 6/30/00
Ended 12/31/04 Inception
- --------------------------------------------------------------------------------
Diamond Hill Focus Fund (DIAMX) 16.86% 7.69%
- --------------------------------------------------------------------------------
Russell 3000 Index 11.95% -1.57%
- --------------------------------------------------------------------------------
* The Fund return excludes any sales charges but includes all other
expenses. Standardized returns are disclosed on the following page.
Results longer than one year are annualized.
- --------------------------------------------------------------------------------
Portfolio Commentary
- --------------------------------------------------------------------------------
/s/ R.H. Dillon
R.H. Dillon, CFA
Co-Portfolio Manager
/s/ Charles S. Bath
Charles S. Bath, CFA
Co-Portfolio Manager
The Diamond Hill Focus Long-Short Fund returned 16.86% in 2004 compared to
11.95% for the Russell 3000. We are pleased with the performance of the Fund in
both relative and absolute terms. We are especially pleased that the fund was
able to perform well in a strong market. While the short positions proved to be
a slight drag on performance, particularly in the fourth quarter, the strong
performance in the larger long positions allowed us to post excellent
performance in 2004.
As we entered 2004, one of the most attractive areas of the market was the small
capitalization stocks. It was the performance of many small capitalization names
like Southwest Energy and Brink's, which drove the performance of the portfolio.
These continue to be holdings in the portfolio as their valuation has failed to
fully reflect the growth opportunities available to these companies.
Southwest Energy is an example of the one of the several opportunities we find
in the energy sector. Energy is approximately 20% of the portfolio due to the
attractive long- term outlook for the sector. Strong worldwide demand growth
combined with limited capacity growth has led to a tight supply/demand
situation. This should support higher energy prices for the foreseeable future.
It is the high prices for energy products, which should drive earnings growth
for companies like Southwest Energy and should make these companies attractive
long-term investments.
A large new holding in the portfolio is Phelps Dodge. This company is the
largest U.S. based copper company. The situation in copper is similar to energy
where large worldwide demand growth is straining capacity and driving price
increases. The outlook for continued high copper prices should lead to strong
earnings growth for Phelps Dodge. However, the stock price does not reflect this
opportunity. Therefore, it is one of the largest holdings in the portfolio.
The short positions continue to be dominated by technology, Internet, and
consumer companies. It is these industries, where valuation is most problematic,
and therefore provides the best shorting opportunities. In 2004, the short
portion of the portfolio proved to be a drag on performance. However, we are
finding several good shorting opportunities and look forward to earning money in
this strategy in 2005.
We want to thank shareholders for their continued support in 2004. We look
forward to working with you in the years ahead.
/s/ R. H. Dillon
R. H. Dillon, CFA
Portfolio Manager
/s/ Charles S. Bath
Charles S. Bath, CFA
Portfolio Manager
- --------------------------------------------------------------------------------
Page 12 Diamond Hill Funds Annual Report December 31, 2004
- --------------------------------------------------------------------------------
Growth of $10,000
- --------------------------------------------------------------------------------
Comparison of the Change in Value of a $10,000 Investment in the Diamond Hill
Focus Long-Short Fund - Class A(A) and the Russell 3000 Index
[The following data represents the mountain graph depicted in the printed
material.]
Focus Fund Russell 3000
Class A Index
06/30/00 9,425 10,000
09/30/00 9,774 10,043
12/31/00 9,635 9,139
03/31/01 10,295 8,027
06/30/01 11,529 8,580
09/30/01 8,522 7,240
12/31/01 10,223 8,091
03/31/02 11,277 8,170
06/30/02 10,338 7,100
09/30/02 8,499 5,877
12/31/02 9,160 6,348
03/31/03 8,479 6,155
06/30/03 10,128 7,155
09/30/03 10,195 7,400
12/31/03 11,259 8,320
03/31/04 11,670 8,506
06/30/04 11,900 8,619
09/30/04 12,629 8,455
12/31/04 13,157 9,314
---------------------------------
Diamond Hill Focus Fund - Class A
Average Annual Total Return(B)
One Year Since Inception(C)
10.11% 6.28%
---------------------------------
(A) The chart above represents the performance of Class A shares only, which
will vary from the performance of Class C shares based on the difference
in charges and fees paid by shareholders in the different classes.
(B) The average annual total returns shown above are adjusted for maximum
applicable sales charge of 5.75%.
(C) Class A shares commenced operations on June 30, 2000.
Past performance is no guarantee of future results.The principal value and
investment return of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
The performance of the above Fund does not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or the redemption of Fund shares.
Tabular Presentation of Schedule of Investments
- --------------------------------------------------------------------------------
The table below provides the Focus Long-Short Fund's sector allocation. We hope
it will be useful to shareholders as it summarizes key information about the
Fund's investments.
% of Long % of Net
Sector Allocation Portfolio Assets
- ----------------- --------- ------
Long Portfolio
Consumer Discretionary 14% 14%
Consumer Staples 3% 3%
Energy 19% 19%
Financials 7% 7%
Health Care 9% 9%
Industrials 10% 10%
Materials 14% 14%
Utilities 3% 3%
Cash & Cash Equivalents 21% 21%
------
100%
------
% of Short % of Net
Sector Allocation Portfolio Assets
- ----------------- --------- ------
Short Portfolio
Consumer Discretionary 51% -17%
Consumer Staples 4% -1%
Health Care 5% -1%
Industrials 6% -2%
Information Technology 25% -9%
Utilities 8% -3%
Semiconductors 1% -1%
------
100%
------
Other
Segregated Cash with Brokers 35%
Other Assets/Liabilities (net) -1%
------
100%
------
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2004 Page 13
- --------------------------------------------------------------------------------
Diamond Hill Bank & Financial Fund
- --------------------------------------------------------------------------------
Performance Update
- --------------------------------------------------------------------------------
Results (Class A) Since Inception*
Since
Year Five Year 8/1/97
Ended 12/31/04 Ended 12/31/04 Inception
- -----------------------------------------------------------------------------------------------
Diamond Hill Bank & Financial Fund (BANCX) 16.67% 20.89% 14.90%
- -----------------------------------------------------------------------------------------------
S&P SuperComposite 1500 Financial Index 11.92% 7.31% 7.40%
- -----------------------------------------------------------------------------------------------
NASDAQ Bank Index 13.67% 16.47% 11.19%
- -----------------------------------------------------------------------------------------------
* The Fund return excludes any sales charges but includes all other
expenses. Standardized returns are disclosed on the following page.
Results longer than one year are annualized.
- --------------------------------------------------------------------------------
Portfolio Commentary
- --------------------------------------------------------------------------------
[PHOTO]
Christopher M. Bingaman, CFA
Portfolio Manager
Thank you for your interest in the Diamond Hill Bank & Financial Fund.
After a rather tentative start, 2004 witnessed another year of solid price
appreciation for the Diamond Hill Bank & Financial Fund as well as the overall
U.S. stock market. For the fifth straight year, financial services companies
out-performed the overall domestic equity market. Almost without exception,
equity indices in the U.S. were in positive territory for the second straight
year. The S&P 500 index recorded a total return for the year of 10.88%, while
the S&P 1500 Financials posted a total return of 11.92%. As they did in the
prior four years, small banks and thrifts once again outperformed the broader
markets albeit by a much narrower margin. The NASDAQ Bank index (which is
generally indicative of the performance of small cap banks and thrifts) recorded
a positive total return of 13.67%. The total return for the Diamond Hill Bank &
Financial Fund (class A shares) in 2004 was 16.67%. As I said in last year's
letter, I am pleased with the Funds' performance over the past few years
however, these levels of absolute performance are not likely sustainable. Also,
it appears the opportunity for the sector to out-perform on a relative basis has
greatly diminished. In other words, we are now expecting financial sector
returns to be in-line with the returns of the overall market indices. We
continue to expect the performance of the Bank & Financial Fund to be superior
to the overall financial sector (over sufficiently long time periods) and we are
hopeful the Fund will provide shareholders with acceptable results on an
absolute basis.
Once again, 2004 witnessed a robust level of merger and acquisition activity
within the sector. More specifically, two companies that were represented in the
Fund were purchased at substantial premiums by larger institutions during 2004.
Charter One (CF) announced an agreement with Royal Bank of Scotland and
Southtrust agreed to merge into Wachovia Bank (WB). Both transactions were
announced in the second quarter and closed in the back half of the year. The
Charter One deal was an all cash transaction, while Southtrust was an all-stock
deal. The Fund continues to hold the Wachovia shares received at closing.
Other notable contributors to the Fund's performance in 2004 were Hanmi
Financial Corp. (HAFC) and Countrywide Financial Corp (CFC). The Fund received
shares in Hanmi Financial during the first quarter after they purchased Pacific
Union Bank (PUBB), which had been a substantial holding in the portfolio. The
stock of the newly formed company provided a total return in excess of 83% for
the year as the company executed the merger integration and continued to grow at
a very rapid pace. Countrywide Financial, primarily a mortgage banking company,
was again a large positive contributor to the Fund's 2004 performance. The stock
appreciated nearly 48% during the year as the company performed superbly within
an industry that also performed surprisingly well after two years of
record-breaking results. Countrywide continues to take market share in from its
competitors and has used the mortgage origination boom to greatly expand its
mortgage servicing business as well as to rapidly grow its banking subsidiary.
While we remain comfortable with the company's fundamentals, the stock now
appears to generally reflect those fundamentals and therefore the size of the
position has been greatly reduced over the past few quarters.
As in past years, the Fund benefited greatly from the performance of many small
banks and thrifts. However, the Fund also enjoyed strong returns from
investments in many larger capitalization companies that were added to fund
during the past two years. Over the last few years, several investments were
made in larger companies that are more exposed to relatively higher risk lending
activities as well as the overall capital markets. Thus far, many of these
investments have
- --------------------------------------------------------------------------------
Page 14 Diamond Hill Funds Annual Report December 31, 2004
- --------------------------------------------------------------------------------
Portfolio Commentary (continued)
- --------------------------------------------------------------------------------
appreciated nicely and continue to look attractive (especially on a relative
basis). As one may reasonably guess from these comments, the level of investment
in small cap banks and thrifts continues to diminish in the Fund. Many of these
holdings have reached full value and have been either partially or fully
divested. Meanwhile it has become increasingly difficult to find new small-cap
alternatives as these fully valued holdings are sold. So while the outlook for
small community based banks remains bright, it has become difficult to find the
underlying stocks at a significant discount to intrinsic value. We are always on
the lookout for new opportunities in this area and suspect we will continue to
have significant investments in small caps when the price vs. value equation is
favorable.
As in the past, we continue to believe shareholders in the fund will benefit
from a relatively concentrated portfolio. We will likely own between 25 and 35
stocks in the fund with an average position size of between 3% and 4%. Also, as
you may know, the Board of Trustees has provided the advisor with the ability to
take short positions in Fund. As it has recently become more difficult to find
investments that meet our expected return criteria, we may begin to deploy some
capital by shorting certain securities that we believe are trading at
substantial premiums to our calculations intrinsic value. We do not intend to do
this as a `hedge' to mitigate our long exposure, but instead as way to enhance
our performance over time. Finally, we continually strive to maintain our
disciplined process of evaluating both the fundamentals and valuations of our
current and prospective investments.
/s/ Christopher M. Bingaman
Christopher M. Bingaman, CFA
Portfolio Manager
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2004 Page 15
- --------------------------------------------------------------------------------
Growth of $10,000
- --------------------------------------------------------------------------------
Comparison of the Change in Value of a $10,000 Investment in the Diamond Hill
Bank & Financial Fund- Class A(A), the S&P SuperComposite 1500 Financial Index
and the NASDAQ Bank Index
[The following data represents the mountain graph depicted in the printed
material.]
S&P 1500
Bank & Financial Supercomposite Nasdaq Bank
Fund Class A Financial Index Index
08/01/97 9,425 10,000 10,000
08/31/97 9,387 9,318 9,925
09/30/97 10,254 10,082 10,984
12/31/97 11,687 10,831 12,136
03/31/98 12,705 12,049 12,966
06/30/98 13,044 12,356 12,476
09/30/98 10,452 9,742 10,210
12/31/98 10,620 11,827 10,892
03/31/99 10,490 12,529 10,424
06/30/99 11,470 13,137 11,182
09/30/99 10,870 11,093 10,133
12/31/99 10,226 11,940 10,257
03/31/00 9,249 12,106 9,348
06/30/00 8,756 11,684 9,206
09/30/00 10,115 14,398 11,010
12/31/00 11,574 14,784 12,077
03/31/01 11,836 13,302 11,795
06/30/01 13,577 14,338 13,268
09/30/01 14,050 12,487 13,034
12/31/01 14,342 13,384 13,592
03/31/02 15,852 13,908 14,973
06/30/02 16,687 12,940 15,482
09/30/02 15,006 10,783 14,235
12/31/02 15,952 11,547 14,535
03/31/03 15,566 13,654 14,279
06/30/03 18,375 12,965 16,207
09/30/03 19,487 13,548 17,189
12/31/03 22,628 15,182 19,338
03/31/04 23,488 15,957 19,785
06/30/04 23,843 15,578 19,640
09/30/04 24,613 15,687 20,196
12/31/04 26,402 16,992 21,981
--------------------------------------------
Diamond Hill Bank & Financial Fund - Class A
Average Annual Total Return(B)
One Year Five Year Since Inception(C)
9.98% 19.46% 13.98%
---------------------------------------------
(A) The chart above represents the performance of Class A shares only, which
will vary from the performance of Class C shares based on the difference
in charges and fees paid by shareholders in the different classes.
(B) The average annual total returns shown above are adjusted for maximum
applicable sales charge of 5.75%.
(C) Class A shares commenced operations on August 1, 1997.
Past performance is no guarantee of future results.The principal value and
investment return of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
The performance of the above Fund does not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or the redemption of Fund shares.
Tabular Presentation of Schedule of Investments
- --------------------------------------------------------------------------------
The table below provides the Bank & Financial Fund's sector allocation. We hope
it will be useful to shareholders as it summarizes key information about the
Fund's investments.
Sector Allocation % of Net Assets
- ----------------- ---------------
Preferred Stocks - Finance 4%
Common Stocks:
Consumer Finance 1%
Finance - Banks & Thrifts 55%
Financial - Diversified 9%
Insurance 8%
Real Estate Investment Trust 2%
Cash and Cash Equivalents 21%
-------
100%
-------
- --------------------------------------------------------------------------------
Page 16 Diamond Hill Funds Annual Report December 31, 2004
- --------------------------------------------------------------------------------
Diamond Hill Strategic Income Fund
- --------------------------------------------------------------------------------
Performance Update
- --------------------------------------------------------------------------------
Results (Class A) Since Inception*
Since
Year 9/30/02
Ended 12/31/04 Inception
- --------------------------------------------------------------------------------
Diamond Hill Strategic Income Fund (DSIAX) 7.46% 14.44%
- --------------------------------------------------------------------------------
Merrill Lynch Domestic Master Index 4.34% 4.47%
- --------------------------------------------------------------------------------
* The Fund return excludes any sales charges but includes all other
expenses. Standardized returns are disclosed on the following page.
Results longer than one year are annualized.
- --------------------------------------------------------------------------------
Portfolio Commentary
- --------------------------------------------------------------------------------
[PHOTO]
Kent K. Rinker
Portfolio Manager
The Diamond Hill Strategic Income Fund produced a total return of 7.46% for the
year ended 12/31/04. This compared favorably to the Merrill Lynch Domestic
Master Index, which had a total return of 4.34%. Once again, asset selection was
the key to our performance. For the balance of the year, we had been expecting
interest rates to rise, and so we kept a fairly short maturity structure for the
bond portion of the portfolio. Indeed, short-term rates rose quite a bit, as the
Federal Reserve raised the Fed Funds rate from 1% to 2.25%. However long-term
rates, as measured by the yield on the 10-year U.S.Treasury finished the year at
4.25%, which is roughly the same yield that they started the year.
In terms of our performance for the past year, a large part of the annual return
came from having high yielding securities in the portfolio. The 12-month yield
of 5.53% was 74% of the total return for the year. During the year, we were
helped by prices appreciating in the Master Limited Partnership securities and
the REIT securities. However, because we were underweight the REIT area, we
"left some money on the table". We could not get comfortable with the industry
fundamentals and felt that most REITs were overvalued throughout the year. We
feel even more so today. In the bond portfolio, we were once again helped by the
out performance of corporate bonds versus U.S.Treasuries. Corporate yield
spreads continued to contract, and this was beneficial to us.
Lastly, from a negative point of view, we were hurt by investments in what are
called range notes. The prices of these securities are quite sensitive to
interest rates and reacted quite negatively to the upward spike in interest
rates during the second quarter. These securities were eliminated from the
portfolio during the second half of the year.
All in all, it was a pretty good year and we were able to meet our objectives,
in what turned out to be a difficult market environment. Thank you for your
continued support for the Diamond Hill Strategic Income Fund.
/s/ Kent Rinker
Kent Rinker
/s/ Rick Moore
Rick Moore, CFA
/s/ William Zox
William Zox, CFA, J.D., LL.M.
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2004 Page 17
- --------------------------------------------------------------------------------
Growth of $10,000
- --------------------------------------------------------------------------------
Comparison of the Change in Value of a $10,000 Investment in the Diamond Hill
Strategic Income Fund - Class A(A) and the
Merrill Lynch Domestic Master Index
[The following data represents the mountain graph depicted in the printed
material.]
Merrill Lynch
Strategic Income Domestic Master
Fund Class A Index
09/30/02 9,525 10,000
12/31/02 9,952 10,159
03/31/03 10,418 10,300
06/30/03 10,720 10,561
09/30/03 11,461 10,548
12/31/03 12,009 10,578
03/31/04 12,400 10,859
06/30/04 11,921 10,592
09/30/04 12,531 10,932
12/31/04 12,905 11,036
--------------------------------------------
Diamond Hill Strategic Income Fund - Class A
Average Annual Total Returns(B)
One Year Since Inception(C)
2.34% 11.98%
--------------------------------------------
(A) The chart above represents the performance of Class A shares only, which
will vary from the performance of Class C shares based on the difference
in charges and fees paid by shareholders in the different classes.
(B) The total return shown above is adjusted for maximum applicable sales
charge of 4.75%.
(C) Class A shares commenced operations on September 30, 2002.
Past performance is no guarantee of future results.The principal value and
investment return of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
The performance of the above Fund does not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or the redemption of Fund shares.
Tabular Presentation of Schedule of Investments
- --------------------------------------------------------------------------------
The table below provides the Strategic Income Fund's sector allocation. We hope
it will be useful to shareholders as it summarizes key information about the
Fund's investments.
Sector Allocation % of Net Assets
- ----------------- ---------------
Master Limited Partnerships 12%
REIT Common Stock 5%
REIT Preferred Stock 21%
Trust Preferred Stock 27%
Corporate Bonds - Maturing > 2 Years 16%
Corporate Bonds - Maturing or
Likely to Be Called < 2 Years 9%
U.S. Government or Agency Securities 2%
Cash and Cash Equivalents 8%
------
100%
------
- --------------------------------------------------------------------------------
Page 18 Diamond Hill Funds Annual Report December 31, 2004
- --------------------------------------------------------------------------------
Diamond Hill Short Term Fixed Income Fund
- --------------------------------------------------------------------------------
Performance Update
- --------------------------------------------------------------------------------
Results (Class A) Since Inception*
Since
Year 6/28/02
Ended 12/31/04 Inception
- -------------------------------------------------------------------------------------------
Diamond Hill Short Term Fixed Income Fund (DHFAX) 2.04% 2.67%
- -------------------------------------------------------------------------------------------
Merrill Lynch 1-3 Year U.S. Corporate/Government Bond Index 1.21% 3.01%
- -------------------------------------------------------------------------------------------
* The Fund return excludes any sales charges but includes all other
expenses. Standardized returns are disclosed on the following page.
Results longer than one year are annualized.
- --------------------------------------------------------------------------------
Portfolio Commentary
- --------------------------------------------------------------------------------
[PHOTO]
Kent K. Rinker
Portfolio Manager
The Diamond Hill Short Term Fixed Income Fund generated a total rate of return
of 2.04% for the year 2004. It is somewhat remarkable that this is exactly the
same return that we generated in 2003. The difference between the two years is
that this year we outperformed the Merrill Lynch 1-3 Year U.S.
Corporate/Government Bond Index by 83 basis points and last year we trailed the
same index by 71 basis points. We were invested in the same types of securities
each year, so what caused the difference? Basically, in 2003 short-term interest
rates were at multi-year lows and stayed there for the balance of the year. In
2004, The Federal Reserve raised the Fed Funds rate 5 times from 1% to 2.25%.
Our forecast, for quite some time, has been that short-term interest rates were
too low and that they would need to rise. In 2004, that process began. According
to the Federal Reserve, interest rates will continue to be increased in 2005 at
a "measured pace", until we get to a "neutral" rate. Even Alan Greenspan has
been quoted as saying that he is not sure what a neutral rate is, but he will
know it when we get there. It would seem that neutrality for short-term interest
rates should be reached when we get to a point where we have solid growth in our
economy, without the fear of inflation. The assumption in the fixed income
markets is that neutral rate is about 3.25%
We have made no changes to our investment style. We continue to own
short-maturity corporate bonds and short average life mortgage securities. These
securities helped us during the past year, when interest rates rose, and we
anticipate that they will continue to provide the yield we are looking for in a
very low yield environment.
We thank you for your continued support of the Diamond Hill Short Term Fixed
Income Fund.
/s/ Kent Rinker
Kent Rinker
/s/ Rick Moore
Rick Moore, CFA
/s/ William Zox
William Zox, CFA, J.D., LL.M.
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2004 Page 19
- --------------------------------------------------------------------------------
Growth of $10,000
- --------------------------------------------------------------------------------
Comparison of the Change in Value of a $10,000 Investment in the Diamond Hill
Short Term Fixed Income Fund - Class A(A) and the Merrill Lynch 1-3 Year U.S.
Corporate/Government Index
[The following data represents the mountain graph depicted in the printed
material.]
Merrill Lynch
Short Term 1-3 yr US
Fixed Income Corporate/
Fund Class A Government Index
06/28/02 9,975 10,000
09/30/02 10,149 10,236
12/31/02 10,234 10,358
03/31/03 10,316 10,448
06/30/03 10,069 10,563
09/30/03 10,382 10,616
12/31/03 10,444 10,643
03/31/04 10,539 10,762
06/30/04 10,495 10,641
09/30/04 10,608 10,762
12/31/04 10,657 10,772
---------------------------------------------------
Diamond Hill Short Term Fixed Income Fund - Class A
Average Annual Total Return(B)
One Year Since Inception(C)
1.74% 2.55%
---------------------------------------------------
(A) The chart above represents the performance of Class A shares only, which
will vary from the performance of Class I shares based on the difference
in charges and fees paid by shareholders in the different classes.
(B) The average annual total returns shown above are adjusted for maximum
applicable sales charge of 0.25%.
(C) Class A shares commenced operations on June 28, 2002.
Past performance is no guarantee of future results.The principal value and
investment return of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
The performance of the above Fund does not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or the redemption of Fund shares.
Tabular Presentation of Schedule of Investments
- --------------------------------------------------------------------------------
The table below provides the Short Term Fixed Income Fund's sector allocation.
We hope it will be useful to shareholders as it summarizes key information about
the Fund's investments.
Sector Allocation % of Net Assets
- ----------------- ---------------
Corporate Bonds 37%
Mortgage-Backed Securities 49%
U.S. Government Agency Securities 8%
Municipal Obligations 2%
Cash and Cash Equivalents 3%
Other Assets/Liabilities (net) 1%
------
100%
------
- --------------------------------------------------------------------------------
Page 20 Diamond Hill Funds Annual Report December 31, 2004
Diamond Hill Small Cap Fund
Schedule of Investments
December 31, 2004
Market
Shares Value
- --------------------------------------------------------------------------------
Preferred Stock -- 0.2%
Finance -- 0.2%
Lehman Brothers Holdings 5,000 $ 127,200
- --------------------------------------------------------------------------------
Common Stocks -- 70.6%
Consumer Discretionary -- 20.7%
American Greetings Corp. 83,000 2,104,050
Belo Corp. 43,400 1,138,816
Callaway Golf Co. 105,000 1,417,500
CPI Corp. 26,600 361,494
Ennis Business Forms, Inc. 37,000 712,250
Lodgenet Entertainment Corp.* 42,000 742,980
Maytag Corp. 80,000 1,688,000
MoneyGram International, Inc. 60,000 1,268,400
Multimedia Games, Inc. 70,000 1,103,200
Steiner Leisure Ltd.* 16,000 478,080
The Black & Decker Corp. 9,800 865,634
The Brink's Co. 25,000 988,000
The Finish Line, Inc. 44,000 805,200
United Auto Group, Inc. 33,000 976,470
- --------------------------------------------------------------------------------
14,650,074
- --------------------------------------------------------------------------------
Consumer Staples -- 1.0%
Del Monte Foods Co.* 62,000 683,240
- --------------------------------------------------------------------------------
Energy -- 14.3%
Berry Petroleum Company 23,000 1,097,100
Cimarex Energy Co.* 27,500 1,042,250
Encore Acquisition Co.* 60,000 2,094,600
Helmerich & Payne 40,000 1,361,600
Lufkin Industries, Inc. 25,000 997,700
Southwestern Energy Co.* 43,200 2,189,808
Tidewater, Inc. 38,000 1,353,180
- --------------------------------------------------------------------------------
10,136,238
- --------------------------------------------------------------------------------
Financial -- 9.0%
1st Source Corp. 33,337 850,427
Commercial Capital Bancorp 38,000 880,840
Eagle Hospitality Properties Trust, Inc.* 72,000 741,600
First Industrial Realty Trust, Inc. 7,000 285,110
Hanmi Financial Corp. 26,170 940,550
ITLA Capital Corp.* 18,810 1,105,840
MAF Bancorp, Inc. 16,545 741,547
PXRE Group Ltd. 32,000 806,720
- --------------------------------------------------------------------------------
6,352,634
- --------------------------------------------------------------------------------
Health Care -- 4.0%
Manor Care, Inc. 20,000 708,600
PacifiCare Health Systems, Inc.* 38,000 2,147,760
- --------------------------------------------------------------------------------
2,856,360
- --------------------------------------------------------------------------------
Industrial -- 8.6%
Kaydon Corp. 18,000 594,360
Lincoln Electric Holdings, Inc. 23,000 794,420
The Greenbrier Companies, Inc. 56,900 1,926,065
Trinity Industries, Inc. 60,000 2,044,800
Washington Group International, Inc.* 17,572 724,845
- --------------------------------------------------------------------------------
6,084,490
- --------------------------------------------------------------------------------
Information Technology -- 1.9%
Maxwell Technologies, Inc.* 32,400 328,536
The TriZetto Group, Inc.* 104,156 989,482
- --------------------------------------------------------------------------------
1,318,018
- --------------------------------------------------------------------------------
Materials -- 9.6%
American Pacific Corp. 19,500 165,945
Bowater, Inc. 32,000 1,407,040
Buckeye Technologies, Inc.* 155,900 2,028,259
Century Aluminum Co.* 55,000 1,444,300
Grief, Inc. - Class B 5,500 302,500
Martin Marietta Materials, Inc. 25,000 1,341,500
Olympic Steel, Inc.* 2,750 72,903
- --------------------------------------------------------------------------------
6,762,447
- --------------------------------------------------------------------------------
Utilities -- 1.5%
WPS Resources Corp. 21,000 1,049,160
- --------------------------------------------------------------------------------
Total Common Stocks $ 49,892,661
- --------------------------------------------------------------------------------
Registered Investment Companies -- 13.9%
Diamond Hill Short Term
Fixed Income Fund - Class I ^ 282,356 $ 2,803,792
First American Prime
Obligations Fund - Class Y 3,488,230 3,488,230
First American Treasury
Obligations Fund - Class Y 3,488,230 3,488,230
- --------------------------------------------------------------------------------
Total Registered
Investment Companies $ 9,780,252
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2004 Page 21
Diamond Hill Small Cap Fund
Schedule of Investments (Continued)
December 31, 2004
Market
Par Value Value
- --------------------------------------------------------------------------------
Certificate Of Deposit -- 2.8%
Huntington National, 2.28%, 1/7/05 $ 2,000,000 $ 2,000,000
- --------------------------------------------------------------------------------
U.S.Treasury Obligations -- 5.6%
U.S.Treasury Note, 1.63%, 4/30/05 1,000,000 997,539
U.S.Treasury Note, 1.25%, 5/31/05 2,000,000 1,990,468
U.S.Treasury Note, Discount
Note, 4/28/05 1,000,000 992,493
- --------------------------------------------------------------------------------
Total U.S.Treasury Obligations $ 3,980,500
- --------------------------------------------------------------------------------
Total Investment Securities -- 93.1%
(Amortized Cost $53,054,737) $ 65,780,613
Other Assets In Excess
Of Liabilities -- 6.9% 4,889,870
- --------------------------------------------------------------------------------
Net Assets -- 100.0% $ 70,670,483
================================================================================
* Non-income producing security.
^ Affiliated Fund, managed by Diamond Hill Capital Management, Inc.
See accompanying notes to financial statements.
Diamond Hill Large Cap Fund
Schedule of Investments
December 31, 2004
Market
Shares Value
- --------------------------------------------------------------------------------
Common Stocks -- 89.6%
Consumer Discretionary -- 9.9%
American Greetings Corp. 23,500 $ 595,725
Belo Corp. 6,500 170,560
Fortune Brands, Inc. 4,200 324,156
MoneyGram International, Inc. 4,500 95,130
The Black & Decker Corp. 4,400 388,652
The Brink's Co. 8,100 320,112
- --------------------------------------------------------------------------------
1,894,335
- --------------------------------------------------------------------------------
Consumer Staples -- 5.6%
Archer-Daniels-Midland Co. 27,300 609,063
Kimberly-Clark Corp. 7,100 467,251
- --------------------------------------------------------------------------------
1,076,314
- --------------------------------------------------------------------------------
Energy -- 19.8%
Anadarko Petroleum Corp. 10,100 654,581
Apache Corp. 18,100 915,316
Burlington Resources, Inc. 10,300 448,050
ConocoPhillips 10,200 885,666
Devon Energy Corp. 22,200 864,024
- --------------------------------------------------------------------------------
3,767,637
- --------------------------------------------------------------------------------
Financial -- 10.0%
Allstate Corp. 11,700 605,124
Comerica, Inc. 5,200 317,304
U.S. Bancorp 12,000 375,840
Wells Fargo & Co. 6,000 372,900
Westpac Banking Corp. - ADR 3,000 227,790
- --------------------------------------------------------------------------------
1,898,958
- --------------------------------------------------------------------------------
Health Care -- 11.7%
Boston Scientific Corp.* 12,400 440,820
Johnson & Johnson 5,100 323,442
Manor Care, Inc. 8,400 297,612
PacifiCare Health Systems, Inc.* 19,100 1,079,532
Pfizer, Inc. 3,100 83,359
- --------------------------------------------------------------------------------
2,224,765
- --------------------------------------------------------------------------------
Industrial -- 13.2%
Eaton Corp. 3,100 224,316
Fluor Corp. 12,100 659,571
Masco Corp. 5,200 189,956
Norfolk Southern Corp. 16,200 586,278
Parker Hannifin Corp. 2,250 170,415
Trinity Industries, Inc. 19,900 678,192
- --------------------------------------------------------------------------------
2,508,728
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Page 22 Diamond Hill Funds Annual Report December 31, 2004
Diamond Hill Large Cap Fund
Schedule of Investments (Continued)
December 31, 2004
Market
Shares Value
- --------------------------------------------------------------------------------
Common Stocks -- 89.6% continued
Materials -- 15.6%
Bowater, Inc. 6,200 $ 272,614
Dow Chemical Co. 7,400 366,374
MeadWestvaco Corp. 21,500 728,635
Neenah Paper, Inc.* 215 7,009
Phelps Dodge Corp. 9,800 969,416
Vulcan Materials Co. 950 51,880
Weyerhaeuser Co. 8,700 584,814
- --------------------------------------------------------------------------------
2,980,742
- --------------------------------------------------------------------------------
Utilities -- 3.8%
American Electric Power Co., Inc. 5,900 202,606
Dominion Resources, Inc. 7,800 528,372
- --------------------------------------------------------------------------------
730,978
- --------------------------------------------------------------------------------
Total Common Stocks $ 17,082,457
- --------------------------------------------------------------------------------
Registered Investment Companies -- 9.7%
First American Government
Obligations Fund - Class Y 874,632 $ 874,632
First American Prime
Obligations Fund - Class Y 968,625 968,625
- --------------------------------------------------------------------------------
Total Registered
Investment Companies $ 1,843,257
- --------------------------------------------------------------------------------
Market
Par Value Value
- --------------------------------------------------------------------------------
U.S.Treasury Obligations -- 2.6%
U.S.Treasury Note, Discount
Note, 4/28/05 $ 500,000 $ 496,247
- --------------------------------------------------------------------------------
Total Investment Securities -- 101.9%
(Amortized Cost $15,603,343) $ 19,421,961
Liabilities In Excess
Of Other Assets -- (1.9%) (353,149)
- --------------------------------------------------------------------------------
Net Assets -- 100.0% $ 19,068,812
================================================================================
* Non-income producing security.
ADR - American Depository Receipt
See accompanying notes to financial statements.
Diamond Hill Focus Long-Short Fund
Schedule of Investments
December 31, 2004
Market
Shares Value
- --------------------------------------------------------------------------------
Common Stocks -- 78.8%
Consumer Discretionary -- 13.7%
American Greetings Corp.+ 72,500 $ 1,837,875
Belo Corp. + 33,000 865,920
CPI Corp. + 30,700 417,213
Fortune Brands, Inc. + 13,000 1,003,340
Maytag Corp. + 60,000 1,266,000
MoneyGram International, Inc. + 58,500 1,236,690
The Black & Decker Corp. + 17,000 1,501,610
The Brink's Co. + 29,825 1,178,684
- --------------------------------------------------------------------------------
9,307,332
- --------------------------------------------------------------------------------
Consumer Staples -- 3.3%
Archer-Daniels-Midland Co.+ 100,500 2,242,155
- --------------------------------------------------------------------------------
Energy -- 19.3%
Anadarko Petroleum Corp.+ 38,500 2,495,185
Apache Corp. + 63,100 3,190,968
ConocoPhillips + 36,300 3,151,929
Devon Energy Corp. + 80,000 3,113,600
Southwestern Energy Co.*+ 23,000 1,165,870
- --------------------------------------------------------------------------------
13,117,552
- --------------------------------------------------------------------------------
Financial -- 6.9%
Allstate Corp. + 36,800 1,903,296
U.S. Bancorp. + 44,000 1,378,080
Wells Fargo & Co. + 22,000 1,367,300
- --------------------------------------------------------------------------------
4,648,676
- --------------------------------------------------------------------------------
Health Care -- 9.1%
Boston Scientific Corp.*+ 45,000 1,599,750
Johnson & Johnson + 19,000 1,204,980
PacifiCare Health Systems, Inc.*+ 60,000 3,391,200
- --------------------------------------------------------------------------------
6,195,930
- --------------------------------------------------------------------------------
Industrial -- 10.2%
Fluor Corp. + 41,500 2,262,165
Norfolk Southern Corp. + 57,500 2,080,925
Trinity Industries, Inc. + 75,400 2,569,632
- --------------------------------------------------------------------------------
6,912,722
- --------------------------------------------------------------------------------
Materials -- 13.8%
Dow Chemical Co. 26,000 1,287,260
MeadWestvaco Corp. + 77,500 2,626,475
Phelps Dodge Corp.+ 32,500 3,214,900
Vulcan Materials Co. + 3,800 207,518
Weyerhaeuser Co. + 30,000 2,016,600
- --------------------------------------------------------------------------------
9,352,753
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2004 Page 23
Diamond Hill Focus Long-Short Fund
Schedule of Investments (Continued)
December 31, 2004
Market
Shares Value
- --------------------------------------------------------------------------------
Utilities -- 2.5%
Dominion Resources, Inc.+ 25,500 $ 1,727,370
- --------------------------------------------------------------------------------
Total Common Stocks $ 53,504,490
- --------------------------------------------------------------------------------
Registered Investment Companies -- 20.3%
Diamond Hill Short Term Fixed
Income Fund - Class I ^ 457,995 $ 4,547,893
First American Government
Obligations Fund - Class Y 4,597,622 4,597,622
First American Prime
Obligations Fund - Class Y 4,597,622 4,597,622
- --------------------------------------------------------------------------------
Total Registered
Investment Companies $ 13,743,137
- --------------------------------------------------------------------------------
Market
Par Value Value
- --------------------------------------------------------------------------------
U.S.Treasury Obligations -- 1.5%
U.S.Treasury Note,
Discount Note, 4/28/05 $ 1,000,000 $ 992,493
- --------------------------------------------------------------------------------
Total Investment Securities -- 100.6%
(Amortized Cost $56,791,207) $ 68,240,120
Segregated Cash With Brokers -- 34.5% 23,405,502
Securities Sold Short -- (34.6)%
(Proceeds $20,209,947) (23,458,319)
Liabilities In Excess
Of Other Assets -- (0.5%) (369,736)
- --------------------------------------------------------------------------------
Net Assets -- 100.0% $ 67,817,567
================================================================================
* Non-income producing security.
+ Security position is either entirely or partially held in a segregated
account as collateral for securities sold short aggregating a total market
value of $50,825,741.
^ Affiliated Fund, managed by Diamond Hill Capital Management, Inc.
See accompanying notes to financial statements.
Diamond Hill Focus Long-Short Fund
Schedule of Securities Sold Short
December 31, 2004
Market
Shares Value
- --------------------------------------------------------------------------------
Common Stocks -- 85.9%
Consumer Discretionary -- 37.9%
Amazon.com, Inc.* 46,000 $ 2,037,340
Clear Channel Communications, Inc. 29,500 987,955
Ford Motor Co. 24,000 351,360
Kohl's Corp.* 37,700 1,853,709
Panera Bread Co.* 4,000 161,280
Sirius Satellite Radio, Inc. 87,000 665,550
The Gap, Inc. 18,000 380,160
Wal-Mart Stores, Inc. 4,700 248,254
Winnbago Industries, Inc. 8,500 332,010
Yahoo!, Inc.* 50,000 1,884,000
- --------------------------------------------------------------------------------
8,901,618
- --------------------------------------------------------------------------------
Consumer Staples -- 4.4%
Colgate-Palmolive Co. 10,000 511,600
Kraft Foods, Inc. 10,900 388,149
Pepsi Bottling Group, Inc. 4,600 124,384
- --------------------------------------------------------------------------------
1,024,133
- --------------------------------------------------------------------------------
Health Care -- 4.6%
Tenet Healthcare* 98,500 1,081,530
- --------------------------------------------------------------------------------
Industrial -- 6.1%
General Electric Co. 30,000 1,095,000
United Parcel Service, Inc. 4,000 341,840
- --------------------------------------------------------------------------------
1,436,840
- --------------------------------------------------------------------------------
Information Technology -- 24.8%
Applied Materials, Inc. 32,700 559,170
Cisco Systems, Inc.* 50,000 965,000
Dell, Inc.* 30,000 1,264,200
EMC Corp.* 50,000 743,500
Intel Corp. 10,000 233,900
International Business Machines Corp. 3,000 295,740
Juniper Networks, Inc.* 45,000 1,223,550
National Semiconductor Corp.* 30,000 538,500
- --------------------------------------------------------------------------------
5,823,560
- --------------------------------------------------------------------------------
Utilities -- 8.1%
Apollo Group, Inc.* 23,400 1,888,614
- --------------------------------------------------------------------------------
Total Common Stocks Sold Short $ 20,156,295
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Page 24 Diamond Hill Funds Annual Report December 31, 2004
Diamond Hill Focus Long-Short Fund
Schedule of Securities Sold Short
(Continued) December 31, 2004
Market
Shares Value
- --------------------------------------------------------------------------------
Exchange Traded Funds -- 14.1%
Consumer Discretionary -- 12.9%
Internet HOLDRs Trust* 20,000 $ 1,425,400
Nasdaq 100 Trust, Series I 40,000 1,596,400
- --------------------------------------------------------------------------------
3,021,800
- --------------------------------------------------------------------------------
Semiconductors -- 1.2%
Semiconductor HOLDRs Trust 8,400 280,224
- --------------------------------------------------------------------------------
Total Exchange Traded Funds $ 3,302,024
- --------------------------------------------------------------------------------
Total Securities Sold Short -- 100.0%
(Proceeds $20,209,947) $ 23,458,319
- --------------------------------------------------------------------------------
* Non-income producing security.
See accompanying notes to financial statements.
Diamond Hill Bank & Financial Fund
Schedule of Investments
December 31, 2004
Market
Shares Value
- --------------------------------------------------------------------------------
Preferred Stocks -- 3.9%
Finance -- 3.9%
1st Source Capital Trust 3,560 $ 86,330
Lehman Brothers Holdings 14,400 366,336
Merrill Lynch Preferred Capital 20,000 509,000
- --------------------------------------------------------------------------------
Total Preferred Stocks $ 961,666
- --------------------------------------------------------------------------------
Common Stocks -- 75.1%
Consumer Finance -- 1.4%
Countrywide Financial Corp. 9,000 $ 333,090
- --------------------------------------------------------------------------------
Finance - Banks & Thrifts -- 54.6%
1st Source Corp. 21,700 553,567
Bank of America Corp. 9,952 467,644
Bank of New York Co., Inc. 11,000 367,620
Capital Corp. of the West 6,193 291,077
Citigroup, Inc. 20,600 992,508
Comerica, Inc. 16,000 976,320
Commercial Capital Bancorp, Inc. 22,264 516,080
Corus Bankshares, Inc. 6,000 288,060
Fifth Third Bancorp 17,000 803,760
First Horizon National Corp. 6,000 258,660
First National Bankshares of Florida 17,000 406,300
First State Bancorp 15,186 558,237
Greater Bay Bancorp 9,000 250,920
Hanmi Financial Corp. 15,159 544,814
ITLA Capital Corp.* 11,802 693,840
MAF Bancorp, Inc. 10,589 474,599
Merchants Bancshares, Inc. 6,002 174,058
National City Corp. 15,000 563,250
PNC Financial Services Group 9,500 545,680
Sovereign Bancorp, Inc. 23,510 530,151
U.S. Bancorp 32,000 1,002,239
Wachovia Corp. 11,680 614,368
Wells Fargo & Co. 16,000 994,400
Westpac Banking Corp. - ADR 7,500 569,475
- --------------------------------------------------------------------------------
13,437,627
- --------------------------------------------------------------------------------
Financial - Diversified -- 8.6%
Federal Home Loan Mortgage Corp. 10,700 788,590
Mellon Financial Corp. 12,000 373,320
Merrill Lynch & Co., Inc. 16,000 956,320
- --------------------------------------------------------------------------------
2,118,230
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2004 Page 25
Diamond Hill Bank & Financial Fund
Schedule of Investments (Continued)
December 31, 2004
Market
Shares Value
- --------------------------------------------------------------------------------
Common Stocks -- 75.1% continued
Insurance -- 8.1%
Allstate Corp. 19,700 $ 1,018,884
Assurant, Inc. 9,950 303,973
Montpelier Re Holdings Ltd. 8,000 307,600
PXRE Group Ltd. 14,000 352,940
- --------------------------------------------------------------------------------
1,983,397
- --------------------------------------------------------------------------------
Real Estate Investment Trust -- 2.4%
Eagle Hospitality Properties Trust, Inc.* 32,500 334,750
First Industrial Realty Trust, Inc. 6,500 264,745
- --------------------------------------------------------------------------------
599,495
- --------------------------------------------------------------------------------
Total Common Stocks $ 18,471,839
- --------------------------------------------------------------------------------
Registered Investment
Companies -- 12.5%
Diamond Hill Short Term Fixed
Income Fund - Class I ^ 62,278 $ 618,419
First American Government
Obligations Fund - Class Y 1,231,411 1,231,411
First American Prime
Obligations Fund - Class Y 1,231,411 1,231,411
- --------------------------------------------------------------------------------
Total Registered
Investment Companies $ 3,081,241
- --------------------------------------------------------------------------------
Market
Par Value Value
- --------------------------------------------------------------------------------
Certificate Of Deposit -- 8.1%
Huntington National,
2.34%, 1/14/05 $ 2,000,000 $ 2,000,000
- --------------------------------------------------------------------------------
Total Investment Securities -- 99.6%
(Amortized Cost $20,190,561) $ 24,514,746
Other Assets In Excess
Of Liabilities -- 0.4% 108,918
- --------------------------------------------------------------------------------
Nets Assets -- 100.0% $ 24,623,664
================================================================================
* Non-income producing security.
^ Affiliated Fund, managed by Diamond Hill Capital Management, Inc.
ADR - American Depository Receipt
See accompanying notes to financial statements.
Diamond Hill Strategic Income Fund
Schedule of Investments
December 31, 2004
Market
Shares Value
- --------------------------------------------------------------------------------
Common Stocks -- 16.7%
Energy -- 10.5%
Atlas Pipeline Partners, L.P. 8,250 $ 345,675
Enbridge Energy Partners, L.P. 8,000 412,560
Energy Transfer Partners, L.P. 14,060 832,351
Enterprise Products Partners, L.P. 17,195 444,663
Kaneb Pipe Line Partners, L.P. 5,980 364,003
Northern Border Partners, L.P. 8,250 397,485
Pacific Energy Partners, L.P. 15,800 456,936
Petrofund Energy Trust 30,500 397,720
Plains All American Pipeline, L.P. 11,300 426,462
Provident Energy Trust 44,500 421,860
TEPPCO Partners, L.P. 10,190 401,384
- --------------------------------------------------------------------------------
4,901,099
- --------------------------------------------------------------------------------
Financial Services -- 1.7%
American Capital Strategies, Ltd. 24,240 808,404
- --------------------------------------------------------------------------------
Real Estate Investment Trust -- 4.5%
Agree Realty Corp. 10,000 316,900
Capital Automotive - REIT 7,800 277,095
Eagle Hospitality Properties Trust, Inc.* 51,900 534,570
Government Properties Trust, Inc. 39,000 384,540
Lexington Corporate Properties Trust 13,200 298,056
RAIT Investment Trust 10,350 289,490
- --------------------------------------------------------------------------------
2,100,651
- --------------------------------------------------------------------------------
Total Common Stocks $ 7,810,154
- --------------------------------------------------------------------------------
Preferred Stock -- 46.9%
Ace Capital Trust I 24,000 $ 606,480
Aetna, Inc., 8.50% 12,000 321,480
AGL Capital Trust 22,000 583,660
Alesco Preferred Funding III+ 1,239,529 1,271,101
Alesco Preferred Funding IV+ 400 409,387
Alesco Preferred Funding V+ 100 103,569
Alesco Preferred Funding VI+ 8,000 802,280
Alexandria Real Estate Series B - REIT 3,000 81,000
Alexandria Real Estate Series C - REIT 14,500 383,815
Allegiant Capital Trust 7,923 215,109
American General Capital III, 8.05% 10,000 261,000
Apartment Invt. & Mgmt. Co.,
7.75% - REIT 8,000 199,040
Bancorpsouth Capital Trust I, 8.15% 15,000 404,400
Bear Stearns Capital Trust, 7.80% 14,800 392,200
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Page 26 Diamond Hill Funds Annual Report December 31, 2004
Diamond Hill Strategic Income Fund
Schedule of Investments (Continued)
December 31, 2004
Market
Shares Value
- --------------------------------------------------------------------------------
Preferred Stocks -- 46.9% continued
BSCH Finance Ltd. 7,800 $ 203,970
Capital Automotive Series A - REIT 12,000 308,400
Capital Automotive Series B - REIT 12,000 316,126
CBL & Associates Series B - REIT 19,400 1,047,600
CBL & Associates Series C - REIT 19,000 499,320
Corporate Backed Trust
Certificates, 7.75% 5,000 137,050
Corporate Backed Trust
Certificates, 8.20% 5,000 136,400
Corporate Backed Trust
Certificates, 8.25% 4,000 104,400
Corporate Office Trust - REIT 4,000 106,000
Corts-TR IV Safeco Capital I 4,000 112,000
Delphi Financial 4,000 109,000
Developers Divers Realty,
8.00% - REIT 2,000 53,500
Developers Divers Realty,
8.60% - REIT 3,000 80,610
Equity Inns, Inc. 7,000 184,407
Everest Re Capital Trust 3,000 82,980
Fleet Capital Trust VI, 8.80% 11,800 303,024
Glimcher Realty Trust 5,000 128,950
Health Care REIT, Inc., 7.625% 10,000 252,500
Health Care REIT, Inc., 7.875% 10,000 259,900
Household Capital Trust V 12,000 308,760
Huntington Preferred
Capital, Inc. - REIT 10,400 292,344
IBC Capital Finance II 5,000 134,000
ING Capital Funding Trust II, 9.20% 11,500 295,780
Innkeepers USA Trust 16,000 412,000
Kilroy Realty Corp., 7.50% - REIT 23,000 582,130
Lexington Corporate
Property Trust - REIT 14,500 388,329
MBNA Capital 8,000 219,200
Merrill Lynch Capital 17,000 432,650
National Rural Utility CFC, 7.625% 7,500 197,250
Parkway Properties, Inc. - REIT 8,000 211,200
PLC Capital Trust III, 7.50% 16,000 422,400
Preferredplus Trust 14,000 365,540
Provident Capital Trust III 33,000 882,090
Provident Capital Trust IV 16,000 428,160
PS Business Parks, Inc., 7.00% - REIT 16,000 396,640
PS Business Parks, Inc., 7.60% - REIT 13,000 331,500
PS Business Parks, Inc., 8.75% - REIT 4,000 107,500
PS Business Parks, Inc., 9.50% - REIT 6,800 182,376
Public Storage, Inc., 9.75% - REIT 40,600 1,036,518
Renaissance Holdings Ltd.,
8.10% Series A 21,000 560,280
Saturns - AWE 5,800 163,560
Saturns - CZN 5,000 130,500
Saturns - FON 19,500 535,275
SL Green Realty, Corp.,
7.625% - REIT 6,600 168,960
Taubman Centers, Inc.,
8.00% - REIT 10,560 274,032
Telephone & Data Systems 4,000 105,520
The Mills Corp., 8.75% - REIT 28,100 799,973
The Mills Corp., 9.00% - REIT 22,600 628,563
Tommy Hilfiger USA, Inc. 4,000 102,320
Zions Capital Trust Series B 16,000 438,400
- --------------------------------------------------------------------------------
Total Preferred Stocks $ 21,994,408
- --------------------------------------------------------------------------------
Market
Par Value Value
- --------------------------------------------------------------------------------
Corporate Bonds -- 25.5%
Consumer, Cyclical -- 1.6%
Cox Communications, Inc.,
6.88%, 6/15/05 $ 350,000 $ 355,619
Dana Corp., 10.13%, 3/15/10 75,000 84,644
Echostar DBS Corp.,
9.13%, 1/15/09 68,000 74,800
Ford Motor Co., 8.88%, 4/1/06 212,000 221,985
- --------------------------------------------------------------------------------
737,048
- --------------------------------------------------------------------------------
Consumer, Non-Cyclical -- 3.2%
RJ Reynolds Tobacco
Holdings, 7.75%, 5/15/06 250,000 261,250
RJ Reynolds Tobacco
Holdings, 6.50%, 6/1/07 500,000 515,000
Royal Caribbean Cruises,
8.00%, 5/15/10 205,000 231,650
Royal Caribbean Cruises,
8.75%, 2/2/11 400,000 472,500
- --------------------------------------------------------------------------------
1,480,400
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2004 Page 27
Diamond Hill Strategic Income Fund
Schedule of Investments (Continued)
December 31, 2004
Market
Par Value Value
- --------------------------------------------------------------------------------
Corporate Bonds -- 25.5% continued
Finance -- 9.5%
Ford Motor Credit Co.,
9.50%, 6/1/10 $ 250,000 $ 290,742
GATX Financial Corp.,
7.75%, 12/1/06 111,000 118,446
GATX Financial Corp.,
6.88%, 12/15/06 30,000 31,536
GATX Financial Corp.,
8.88%, 6/1/09 100,000 115,946
Morgan Stanley, 4.89%, 11/1/13 525,000 540,629
Morgan Stanley, 4.54%, 5/1/14 440,000 441,980
Royal Bank of Canada,
5.85%, 4/23/09 400,000 370,000
SLM Corp., 4.70%, 10/1/10 250,000 255,848
SLM Corp., 4.78%, 11/13/13 300,000 303,231
Tobacco Settlement
Financing Corp., 5.92%, 6/1/12 270,000 269,042
UBS Ag Structured, 5.07%, 6/20/08 750,000 723,750
UBS Ag Structured, 6.60%, 3/20/09 1,000,000 969,999
- --------------------------------------------------------------------------------
4,431,149
- --------------------------------------------------------------------------------
Health Care -- 0.8%
Cardinal Health, Inc., 6.25%, 7/15/08 375,000 396,039
- --------------------------------------------------------------------------------
Industrial -- 6.1%
Beazer Homes, 8.63%, 5/15/11 105,000 114,450
Columbia Energy Group,
7.05%, 11/28/07 350,000 360,255
D.R. Horton, Inc., 9.75%, 9/15/10 100,000 121,000
Ft. James Corp., 6.88%, 9/15/07 50,000 53,125
Georgia-Pacific Corp.,
4.88%, 10/1/07 100,000 102,833
K.B. Home, 8.63%, 12/15/08 90,000 101,700
K.B. Home, 7.75%, 2/1/10 400,000 433,000
K.B. Home, 9.50%, 2/15/11 665,000 731,500
Standard Pacific Corp.,
6.88%, 5/15/11 350,000 369,250
Standard Pacific Corp.,
9.25%, 4/15/12 50,000 58,000
Toll Corp., 8.25%, 2/1/11 200,000 216,000
Toll Corp., 8.25%, 12/1/11 175,000 193,375
- --------------------------------------------------------------------------------
2,854,488
- --------------------------------------------------------------------------------
Retail -- 2.8%
American Greetings,
6.10%, 8/1/28 480,000 512,400
Penny (J.C.) Co., Inc.,
6.50%, 12/15/07 300,000 318,750
Tommy Hilfiger USA, Inc.,
6.85%, 6/1/08 500,000 502,500
- --------------------------------------------------------------------------------
1,333,650
- --------------------------------------------------------------------------------
Technology -- 0.6%
Unisys Corp., 7.88%, 4/1/08 295,000 302,375
- --------------------------------------------------------------------------------
Transportation -- 0.8%
Northwest Air, Inc., 7.63%, 3/15/05 375,000 375,469
- --------------------------------------------------------------------------------
Utilities -- 0.1%
International Telephone, 7.50%, 7/1/11 40,000 40,048
- --------------------------------------------------------------------------------
Total Corporate Bonds $ 11,950,666
- --------------------------------------------------------------------------------
U.S. Government Agency
Obligations -- 2.1%
FHLB, 3.00%, 11/26/07 500,000 $ 499,895
FNMA, 5.13%, 8/16/11 480,000 480,159
- --------------------------------------------------------------------------------
Total U.S. Government
Agency Obligations $ 980,054
- --------------------------------------------------------------------------------
Registered Investment Companies -- 8.7%
First American Government
Obligations Fund - Class Y 1,710,819 $ 1,710,819
First American Prime
Obligations Fund - Class Y 2,352,971 2,352,971
- --------------------------------------------------------------------------------
Total Registered
Investment Companies $ 4,063,790
- --------------------------------------------------------------------------------
Total Investment Securities -- 99.9%
(Amortized Cost $45,410,117) $ 46,799,072
Other Assets In Excess
Of Liabilities -- 0.1% 34,370
- --------------------------------------------------------------------------------
Net Assets -- 100.0% $ 46,833,442
================================================================================
+ Restricted and illiquid securities valued at fair value and not registered
under the Securities Act of 1933. Acquisition date and current cost: Alesco
III - 3/04, $1,239,529;Alesco IV - 5/04, $400,000;Alesco V -10/04,
$100,000;Alesco VI - 12/04, $800,000. At December 31, 2004, these securities
had an aggregate market value of $2,586,337, representing 5.5% of net assets.
REIT - Real Estate Investment Trust
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
Page 28 Diamond Hill Funds Annual Report December 31, 2004
Diamond Hill Short Term Fixed Income Fund
Schedule of Investments
December 31, 2004
Market
Par Value Value
- --------------------------------------------------------------------------------
Corporate Bonds -- 36.7%
Consumer Cyclicals -- 4.1%
Cox Communications, Inc.,
6.88%, 6/15/05 $ 100,000 $ 101,605
Ford Motor Co., 8.88%, 4/1/06 200,000 209,421
Ford Motor Credit Co.,
6.25%, 12/8/05 39,000 39,953
- --------------------------------------------------------------------------------
350,979
- --------------------------------------------------------------------------------
Consumer, Non-Cyclical -- 13.8%
Carnival Corp., 7.05%, 5/15/05 50,000 50,747
Carnival Corp., 4.45%, 6/30/05 175,000 177,615
ITT Corp., 6.75%, 11/15/05 104,000 106,860
Philip Morris, 7.00%, 7/15/05 350,000 355,420
RJ Reynolds Tobacco Holdings,
7.75%, 5/15/06 75,000 78,375
RJ Reynolds Tobacco Holdings,
6.50%, 6/1/07 80,000 82,400
Royal Caribbean Cruises,
8.25%, 4/1/05 183,000 184,830
Royal Caribbean Cruises,
7.25%, 8/15/06 145,000 152,794
- --------------------------------------------------------------------------------
1,189,041
- --------------------------------------------------------------------------------
Finance -- 0.6%
General Motors Acceptance
Corp., 7.50%, 7/15/05 48,000 48,989
- --------------------------------------------------------------------------------
Industrial -- 2.6%
American Standard, Inc.,
7.38%, 4/15/05 45,000 45,545
Fort James Corp., 6.88%, 9/15/07 120,000 127,499
Waste Management, Inc.,
7.00%, 5/15/05 52,000 52,542
- --------------------------------------------------------------------------------
225,586
- --------------------------------------------------------------------------------
Manufacturing -- 1.2%
Tyco International Group SA,
6.38%, 6/15/05 100,000 101,459
- --------------------------------------------------------------------------------
Medical Products -- 0.9%
Mallinckrodt, Inc., 6.75%, 9/15/05 75,000 76,447
- --------------------------------------------------------------------------------
Technology -- 8.8%
Electronic Data Systems
Corp., 7.13%, 5/15/05 225,000 228,338
Unisys Corp., 7.25%, 1/15/05 225,000 225,277
Unisys Corp., 8.13%, 6/1/06 120,000 126,300
Unisys Corp., 7.88%, 4/1/08 175,000 179,375
- --------------------------------------------------------------------------------
759,290
- --------------------------------------------------------------------------------
Utilities -- 4.7%
Duke Capital Corp.,
6.25%, 7/15/05 135,000 137,237
GTE Hawaiian Telephone,
6.75%, 2/15/05 40,000 40,177
Indiana Michigan Power,
6.13%, 12/15/06 100,000 104,710
Oneok, Inc., 7.75%, 8/15/06 50,000 53,176
Reliant Energy Resources,
8.13%, 7/15/05 70,000 71,853
- --------------------------------------------------------------------------------
407,153
- --------------------------------------------------------------------------------
Total Corporate Bonds $ 3,158,944
- --------------------------------------------------------------------------------
Mortgage-Backed Securities -- 49.0%
FHLMC PC Gold Balloon,
6.00%, 11/1/06 24,418 24,957
FHLMC PC Gold Balloon,
5.00%, 4/1/07 96,032 98,102
FHLMC PC Gold Balloon,
5.00%, 12/1/07 236,886 241,992
FHLMC PC Gold Balloon,
5.00%, 3/1/08 519,595 530,892
FHLMC PC Gold Balloon,
6.00%, 7/1/08 112,437 114,817
FHLMC PC Gold Balloon,
5.50%, 8/1/08 68,123 69,622
FHLMC PC Gold Balloon,
5.50%, 9/1/08 423,518 432,838
FHLMC PC Gold Balloon,
5.00%, 11/1/08 42,931 43,711
FHLMC PC Gold Balloon,
5.00%, 4/1/09 91,629 93,307
FHLMC PC Gold Balloon,
5.00%, 11/1/09 365,768 372,468
FHLMC PC Gold Balloon,
4.50%, 4/1/10 246,973 248,792
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2004 Page 29
Diamond Hill Short Term Fixed Income Fund
Schedule of Investments (Continued)
December 31, 2004
Market
Par Value Value
- --------------------------------------------------------------------------------
Mortgage-Backed Securities -- 49.0% continued
FHLMC PC Gold Balloon,
4.00%, 7/1/10 $ 263,657 $ 262,593
FHLMC Pool M90667, 6.00%,
7/1/06 195,591 199,910
FHLMC Pool M90687,
5.50%, 1/1/07 303,126 310,661
FHLMC Pool M90735,
5.00%, 6/1/07 112,974 115,409
FHLMC Pool M90765,
4.50%, 10/1/07 41,786 42,301
FHLMC Pool N90748,
5.00%, 8/1/07 91,410 93,380
FHLMC Pool N97967,
6.00%, 5/1/05 54,218 54,991
FHLMC Pool N98137,
5.00%, 11/1/05 88,582 89,063
FNMA, 6.00%, 1/1/05 38,141 38,143
FNMA, 6.00%, 4/1/05 74,196 75,191
FNMA, 6.00%, 9/1/05 122,710 124,356
FNMA, 5.50%, 1/1/06 17,313 17,466
FNMA, 5.50%, 4/1/06 49,357 49,990
FNMA, 5.00%, 2/1/09 164,479 167,369
FNMA, 5.00%, 2/1/10 296,402 301,610
GMAC Mortgage Corp.
Loan Trust, 5.75%, 11/25/32 447 446
- --------------------------------------------------------------------------------
Total Mortgage-Backed
Securities $ 4,214,377
- --------------------------------------------------------------------------------
U.S. Government Agency
Obligations -- 7.8%
FHLB, 3.00%, 11/26/07 200,000 199,957
FHLB, 3.50%, 4/1/08 25,000 24,896
FHLB, 3.63%, 11/28/08 25,000 24,847
FHLB, 3.25%, 12/30/08 100,000 98,116
FHLMC, 3.38%, 4/23/08 200,000 198,756
FNMA, 5.50%, 4/1/06 76,825 77,810
FNMA, 4.00%, 8/13/10 50,000 49,433
- --------------------------------------------------------------------------------
Total U.S. Government
Agency Obligations $ 673,815
- --------------------------------------------------------------------------------
Municipal Obligations -- 2.3%
Badger Tobacco Asset
Securitization Corp., 5.00%, 6/1/08 50,000 50,827
California Tobacco Settlement
Financing Authority, 3.70%, 5/1/07 50,000 50,020
California Tobacco Settlement
Financing Authority, 4.00%, 5/1/08 100,000 99,749
- --------------------------------------------------------------------------------
Total Municipal Obligations $ 200,596
- --------------------------------------------------------------------------------
Registered Investment Companies -- 3.3%
First American Prime
Obligations Fund - Class Y 287,675 287,675
- --------------------------------------------------------------------------------
Total Investment Securities -- 99.1%
(Amortized Cost $8,530,478) $ 8,535,407
Other Assets In Excess
Of Liabilities -- 0.9% 76,091
- --------------------------------------------------------------------------------
Net Assets -- 100.0% $ 8,611,498
================================================================================
FHLB - Federal Home Loan Bank
FHLMC - Federal Home Loan Mortgage Corporation
FNMA - Federal National Mortgage Association
GMAC - General Motors Acceptance Corporation
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
Page 30 Diamond Hill Funds Annual Report December 31, 2004
Diamond Hill Funds
Statements of Assets & Liabilities
December 31, 2004
Short Term
Focus Bank & Strategic Fixed
Small Cap Large Cap Long-Short Financial Income Income
Fund Fund Fund Fund Fund Fund
- -----------------------------------------------------------------------------------------------------------------------------------
Assets
Investment Securities, at cost $53,054,737 $15,603,343 $56,791,207 $20,190,561 $45,410,117 $ 8,530,478
=================================================================================
Investment Securities:
Non-affiliated securities, at market value $62,976,821 $19,421,961 $63,692,227 $23,896,327 $46,799,072 $ 8,535,407
Affiliated securities, at market value 2,803,792 -- 4,547,893 618,419 -- --
---------------------------------------------------------------------------------
Total Investment Securities, at market value $65,780,613 $19,421,961 $68,240,120 $24,514,746 $46,799,072 $ 8,535,407
Deposits with brokers for securities sold short -- -- 23,405,502 -- -- --
Cash 4,403,594 -- 95,668 311,431 -- --
Receivable for fund shares issued 1,570,263 140,850 718,304 428,483 394,910 --
Receivable for dividends and interest 46,151 21,400 88,973 78,665 280,034 82,405
---------------------------------------------------------------------------------
Total Assets 71,800,621 19,584,211 92,548,567 25,333,325 47,474,016 8,617,812
=================================================================================
Liabilities
Securities sold short, at value
(proceeds $20,209,947) -- -- 23,458,319 -- -- --
Dividends payable -- 1,005 -- 12,899 41,830 4
Payable for securities purchased 954,544 476,653 1,109,650 527,128 496,585 --
Payable for dividends on securities sold short -- -- 15,093 -- -- --
Payable for fund shares redeemed 55,609 8,191 9,764 121,853 14,872 --
Payable to Investment Adviser 42,651 10,946 47,930 20,058 17,707 2,814
Payable to Administrator 23,992 7,037 23,965 9,025 16,794 3,228
Accrued distribution and service fees 53,342 11,567 66,279 18,698 52,786 268
---------------------------------------------------------------------------------
Total Liabilities 1,130,138 515,399 24,731,000 709,661 640,574 6,314
---------------------------------------------------------------------------------
Net Assets $70,670,483 $19,068,812 $67,817,567 $24,623,664 $46,833,442 $ 8,611,498
=================================================================================
Components of Net Assets
Paid-in capital $57,621,654 $15,546,229 $59,630,374 $20,212,315 $45,503,978 $ 8,659,469
Undistributed (distributions in excess of)
net investment income -- (15) -- -- (25,253) 614
Accumulated net realized gains (losses) from
investment transactions 322,953 (296,020) (13,348) 87,164 (34,238) (53,514)
Net unrealized appreciation on investments 12,725,876 3,818,618 8,200,541 4,324,185 1,388,955 4,929
---------------------------------------------------------------------------------
Net Assets $70,670,483 $19,068,812 $67,817,567 $24,623,664 $46,833,442 $ 8,611,498
=================================================================================
Pricing of Class A Shares
Net assets attributable to Class A shares $55,411,470 $17,368,554 $47,007,778 $20,682,403 $31,273,846 $ 290,720
=================================================================================
Shares of beneficial interest outstanding
(unlimited number of shares authorized,
no par value) 2,587,659 1,387,914 3,438,704 1,082,988 2,688,398 29,239
=================================================================================
Net asset value and redemption price per share $ 21.41 $ 12.51 $ 13.67 $ 19.10 $ 11.63 $ 9.94
=================================================================================
Maximum offering price per share $ 22.72 $ 13.27 $ 14.50 $ 20.27 $ 12.21 $ 9.96
=================================================================================
Pricing of Class C Shares
Net assets attributable to Class C shares $15,259,013 $ 1,700,258 $20,809,789 $ 3,941,261 $15,559,596 $ --
=================================================================================
Shares of beneficial interest outstanding
(unlimited number of shares authorized,
no par value) 734,018 138,159 1,569,514 213,998 1,338,285 --
=================================================================================
Net asset value, offering price and
redemption price per share (A) $ 20.79 $ 12.31 $ 13.26 $ 18.42 $ 11.63 $ --
=================================================================================
Pricing of Class I Shares
Net assets attributable to Class I shares $ -- $ -- $ -- $ -- $ -- $ 8,320,778
=================================================================================
Shares of beneficial interest outstanding
(unlimited number of shares authorized,
no par value) -- -- -- -- -- 837,610
=================================================================================
Net asset value, offering price and
redemption price per share $ -- $ -- $ -- $ -- $ -- $ 9.93
=================================================================================
(A) Redemption price per share varies based upon holding period.
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2004 Page 31
Diamond Hill Funds
Statements of Operations
For the Year Ended December 31, 2004
Short Term
Focus Bank & Strategic Fixed
Small Cap Large Cap Long-Short Financial Income Income
Fund Fund Fund Fund Fund Fund
- -----------------------------------------------------------------------------------------------------------------------------
Investment Income
Dividends from non-affiliated
securities $ 235,171 $ 171,847 $ 404,791 $ 429,230 $ 1,555,300 $ 592
Dividends from affiliated securities 47,997 -- 104,251 17,699 -- --
Interest 52,381 11,844 147,589 23,201 867,501 221,898
--------------------------------------------------------------------------------------
Total Investment Income 335,549 183,691 656,631 470,130 2,422,801 222,490
--------------------------------------------------------------------------------------
Expenses
Investment Advisory fees 240,089 77,832 329,519 180,394 174,188 20,294
Administration fees 135,050 50,035 164,759 81,177 156,770 30,442
Distribution fees - Class A 51,445 24,966 63,897 38,418 57,143 1,105
Distribution and service fees -
Class C 94,332 11,326 110,545 26,719 119,803 --
Trustees fees 2,500 2,500 2,500 2,500 2,500 2,500
Dividend expense on securities sold
short -- -- 66,142 -- -- --
--------------------------------------------------------------------------------------
Total Expenses 523,416 166,659 737,362 329,208 510,404 54,341
Trustee fees reimbursed by the
Investment Adviser (2,500) (2,500) (2,500) (2,500) (2,500) (2,500)
--------------------------------------------------------------------------------------
Net Expenses 520,916 164,159 734,862 326,708 507,904 51,841
--------------------------------------------------------------------------------------
Net Investment Income (Loss) (185,367) 19,532 (78,231) 143,422 1,914,897 170,649
--------------------------------------------------------------------------------------
Realized and Unrealized Gains
(Losses) on Investments
Net realized gains (losses) from
security transactions 1,706,121 140,697 484,505 1,895,553 153,733 (2,909)
Net change in unrealized
appreciation/depreciation
on Investments 7,605,261 2,354,692 5,627,840 847,911 484,083 (8,238)
--------------------------------------------------------------------------------------
Net Realized and Unrealized Gains
(Losses) on Investments 9,311,382 2,495,389 6,112,345 2,743,464 637,816 (11,147)
--------------------------------------------------------------------------------------
Net Change in Net Assets from
Operations $ 9,126,015 $ 2,514,921 $ 6,034,114 $ 2,886,886 $ 2,552,713 $ 159,502
======================================================================================
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
Page 32 Diamond Hill Funds Annual Report December 31, 2004
Diamond Hill Funds
Statements of Changes in Net Assets
Small Cap Fund Large Cap Fund
----------------------------- -----------------------------
For the Year For the Year For the Year For the Year
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
2004 2003 2004 2003
----------------------------- -----------------------------
From Operations
Net investment income (loss) $ (185,367) $ (122,735) $ 19,532 $ 26,411
Net realized gains (losses) from
investment transactions 1,706,121 (180,776) 140,697 19,475
Net change in unrealized appreciation/
depreciation on investments 7,605,261 6,077,295 2,354,692 1,459,861
----------------------------- -----------------------------
Net Change in Net Assets from Operations 9,126,015 5,773,784 2,514,921 1,505,747
----------------------------- -----------------------------
Distributions to Shareholders
From net investment income - Class A -- -- (19,316) (26,079)
From net investment income - Class C -- -- -- (332)
Distributions in excess of net investment
income - Class A -- -- -- (231)
From net realized gains on investments - Class A (738,284) (60,726) -- --
From net realized gains on investments - Class C (215,874) (38,074) -- --
----------------------------- -----------------------------
Decrease in Net Assets from Distributions
to Shareholders (954,158) (98,800) (19,316) (26,642)
----------------------------- -----------------------------
From Capital Transactions
Class A
Proceeds from shares sold 41,518,950 4,717,961 10,769,812 2,745,439
Reinvested distributions 680,943 55,393 18,311 25,390
Payments for shares redeemed (4,499,378) (2,793,897) (2,125,728) (952,674)
----------------------------- -----------------------------
Net Increase in Net Assets from Class A
Share Transactions 37,700,515 1,979,457 8,662,395 1,818,155
----------------------------- -----------------------------
Class C
Proceeds from shares sold 7,744,413 2,637,880 972,813 784,890
Reinvested distributions 178,794 31,461 -- 308
Payments for shares redeemed (2,256,124) (2,697,694) (370,165) (334,046)
----------------------------- -----------------------------
Net Increase (Decrease) in Net Assets
from Class C Share Transactions 5,667,083 (28,353) 602,648 451,152
----------------------------- -----------------------------
Total Increase in Net Assets 51,539,455 7,626,088 11,760,648 3,748,412
Net Assets
Beginning of year 19,131,028 11,504,940 7,308,164 3,559,752
----------------------------- -----------------------------
End of year $ 70,670,483 $ 19,131,028 $ 19,068,812 $ 7,308,164
============================= =============================
Distributions in Excess of Net Investment Income $ -- $ -- $ (15) $ (231)
============================= =============================
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2004 Page 33
Diamond Hill Funds
Statements of Changes in Net Assets
Focus Long-Short Fund Bank & Financial Fund
----------------------------- -----------------------------
For the Year For the Year For the Year For the Year
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
2004 2003 2004 2003
----------------------------- -----------------------------
From Operations
Net investment income (loss) $ (78,231) $ (31,638) $ 143,422 $ 39,852
Net realized gains from investment transactions 484,505 232,884 1,895,553 1,345,518
Net change in unrealized appreciation/depreciation
on investments 5,627,840 3,103,206 847,911 2,390,948
----------------------------- -----------------------------
Net Change in Net Assets from Operations 6,034,114 3,304,452 2,886,886 3,776,318
----------------------------- -----------------------------
Distributions to Shareholders
From net investment income - Class A -- -- (140,081) (39,852)
From net investment income - Class C -- -- (8,546) --
From net realized gains on investments - Class A (187,721) -- (1,589,088) (843,497)
From net realized gains on investments - Class C (89,742) -- (321,817) (141,927)
----------------------------- -----------------------------
Decrease in Net Assets from Distributions
to Shareholders (277,463) -- (2,059,532) (1,025,276)
----------------------------- -----------------------------
From Capital Transactions
Class A
Proceeds from shares sold 32,124,370 6,620,918 9,698,126 3,489,934
Reinvested distributions 172,712 -- 1,596,642 807,819
Payments for shares redeemed (5,554,803) (4,504,896) (3,809,143) (4,251,333)
----------------------------- -----------------------------
Net Increase in Net Assets from Class A
Share Transactions 26,742,279 2,116,022 7,485,625 46,420
----------------------------- -----------------------------
Class C
Proceeds from shares sold 13,209,865 4,166,785 1,875,815 842,497
Reinvested distributions 74,950 -- 239,539 105,945
Payments for shares redeemed (572,651) (666,385) (241,394) (78,803)
----------------------------- -----------------------------
Net Increase in Net Assets from Class C
Share Transactions 12,712,164 3,500,400 1,873,960 869,639
---------------------------------------------------------------
Total Increase in Net Assets 45,211,094 8,920,874 10,186,939 3,667,101
Net Assets
Beginning of year 22,606,473 13,685,599 14,436,725 10,769,624
----------------------------- -----------------------------
End of year $ 67,817,567 $ 22,606,473 $ 24,623,664 $ 14,436,725
============================= =============================
Undistributed Net Investment Income $ -- $ -- $ -- $ 5,474
============================= =============================
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
Page 34 Diamond Hill Funds Annual Report December 31, 2004
Diamond Hill Funds
Statements of Changes in Net Assets
Strategic Short Term
Income Fixed Income
Fund Fund
----------------------------- -----------------------------
For the Year For the Year For the Year For the Year
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
2004 2003 2004 2003
----------------------------- -----------------------------
From Operations
Net investment income $ 1,914,897 $ 709,531 $ 170,649 $ 98,341
Net realized gains (losses) from investment
transactions 153,733 549,468 (2,909) 3,046
Net change in unrealized appreciation/
depreciation on investments 484,083 858,518 (8,238) (9,909)
----------------------------- -----------------------------
Net Change in Net Assets from Operations 2,552,713 2,117,517 159,502 91,478
----------------------------- -----------------------------
Distributions to Shareholders
From net investment income - Class A (1,313,374) (549,681) (10,285) (12,846)
From net investment income - Class C (600,190) (159,850) -- --
From net investment income - Class I -- -- (159,750) (85,495)
Distributions in excess of net investment
income - Class A -- -- (1,837) (2,304)
Distributions in excess of net investment
income - Class I -- -- (28,537) (15,330)
From net realized gains on investments - Class A (339,459) (136,498) -- --
From net realized gains on investments - Class C (180,728) (61,355) -- --
----------------------------- -----------------------------
Decrease in Net Assets from Distributions
to Shareholders (2,433,751) (907,384) (200,409) (115,975)
----------------------------- -----------------------------
From Capital Transactions
Class A
Proceeds from shares sold 15,351,676 14,442,711 97,149 328,829
Reinvested distributions 1,561,492 640,414 12,026 15,004
Payments for shares redeemed (3,651,777) (196,825) (289,133) (585,943)
----------------------------- -----------------------------
Net Increase (Decrease) in Net Assets from
Class A Share Transactions 13,261,391 14,886,300 (179,958) (242,110)
----------------------------- -----------------------------
Class C
Proceeds from shares sold 7,985,084 8,291,544 -- --
Reinvested distributions 520,557 147,547 -- --
Payments for shares redeemed (1,403,789) (370,103) -- --
----------------------------- -----------------------------
Net Increase in Net Assets from Class C
Share Transactions 7,101,852 8,068,988 -- --
----------------------------- -----------------------------
Class I
Proceeds from shares sold -- -- 3,000,000 5,400,000
Reinvested distributions -- -- 187,487 99,941
Payments for shares redeemed -- -- (386,071) (2,328,483)
----------------------------- -----------------------------
Net Increase in Net Assets from Class I
Share Transactions -- -- 2,801,416 3,171,458
----------------------------- -----------------------------
Total Increase in Net Assets 20,482,205 24,165,421 2,580,551 2,904,851
Net Assets
Beginning of year 26,351,237 2,185,816 6,030,947 3,126,096
----------------------------- -----------------------------
End of year $ 46,833,442 $ 26,351,237 $ 8,611,498 $ 6,030,947
============================= =============================
Undistributed (Distributions in Excess of)
Net Investment Income $ (25,253) $ -- $ 614 $ --
============================= =============================
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2004 Page 35
Diamond Hill Funds
Schedule of Capital Share Transactions
Small Cap Fund Large Cap Fund Focus Long-Short Fund
- ----------------------------------------------------------------------------------------------------------------------------------
For the For the For the For the For the For the
Year Year Year Year Year Year
Ended Ended Ended Ended Ended Ended
December 31, December 31, December 31, December 31, December 31, December 31,
2004 2003 2004 2003 2004 2003
- ----------------------------------------------------------------------------------------------------------------------------------
Shares
Class A Shares:
Issued 2,087,749 333,349 955,717 312,773 2,482,880 632,778
Reinvested 32,519 3,386 1,464 2,457 12,708 --
Redeemed (241,171) (214,787) (191,825) (112,141) (437,611) (456,822)
--------------------------------------------------------------------------------
Net increase in shares outstanding 1,879,097 121,948 765,356 203,089 2,057,977 175,956
Shares outstanding, beginning of year 708,562 586,614 622,558 419,469 1,380,727 1,204,771
--------------------------------------------------------------------------------
Shares outstanding, end of year 2,587,659 708,562 1,387,914 622,558 3,438,704 1,380,727
--------------------------------------------------------------------------------
Class C Shares:
Issued 409,298 189,406 84,443 90,686 1,052,287 392,608
Reinvested 8,790 1,966 -- 30 5,687 --
Redeemed (122,519) (194,823) (31,364) (38,871) (45,118) (66,137)
--------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding 295,569 (3,451) 53,079 51,845 1,012,856 326,471
Shares outstanding, beginning of year 438,449 441,900 85,080 33,235 556,658 230,187
--------------------------------------------------------------------------------
Shares outstanding, end of year 734,018 438,449 138,159 85,080 1,569,514 556,658
--------------------------------------------------------------------------------
Short Term Fixed
Bank & Financial Fund Strategic Income Fund Income Fund
- ----------------------------------------------------------------------------------------------------------------------------------
For the For the For the For the For the For the
Year Year Year Year Year Year
Ended Ended Ended Ended Ended Ended
December 31, December 31, December 31, December 31, December 31, December 31,
2004 2003 2004 2003 2004 2003
- ----------------------------------------------------------------------------------------------------------------------------------
Shares
Class A Shares:
Issued 505,328 217,138 1,322,249 1,304,876 9,790 32,706
Reinvested 83,998 46,038 135,152 56,609 1,207 1,493
Redeemed (201,754) (300,166) (316,659) (17,303) (28,987) (58,298)
--------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding 387,572 (36,990) 1,140,742 1,344,182 17,990 (24,099)
Shares outstanding, beginning of year 695,416 732,406 1,547,656 203,474 47,229 71,328
--------------------------------------------------------------------------------
Shares outstanding, end of year 1,082,988 695,416 2,688,398 1,547,656 29,239 47,229
--------------------------------------------------------------------------------
Class C / I Shares(A):
Issued 100,714 53,252 687,860 738,922 301,829 538,662
Reinvested 13,122 6,250 45,052 12,951 18,835 9,962
Redeemed (13,369) (5,047) (122,582) (33,010) (38,620) (231,916)
--------------------------------------------------------------------------------
Net increase in shares outstanding 100,467 54,455 610,330 718,863 282,044 316,708
Shares outstanding, beginning of year 113,531 59,076 727,955 9,092 555,566 238,858
--------------------------------------------------------------------------------
Shares outstanding, end of year 213,998 113,531 1,338,285 727,955 837,610 555,566
--------------------------------------------------------------------------------
(A) Represents Class C shares for the Bank & Financial Fund and the Strategic
Income Fund, and Class I shares for the Short Term Fixed Income Fund.
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
Page 36 Diamond Hill Funds Annual Report December 31, 2004
Diamond Hill Funds
Financial Highlights
For a share outstanding throughout each period.
Year Ended Year Ended Year Ended Period Ended Period Ended
December 31, December 31, December 31, December 31, February 28,
Diamond Hill Small Cap Fund - Class A 2004 2003 2002 2001(A) 2001(B)
-----------------------------------------------------------------------
Net asset value at beginning of period $ 16.82 $ 11.26 $ 12.29 $ 11.26 $ 10.00
-----------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income (loss) (0.03) (0.06) (0.17) (0.03) 0.02
Net realized and unrealized gains
(losses) on investments 4.94 5.71 (0.84) 1.31 1.24
-----------------------------------------------------------------------
Total from investment operations 4.91 5.65 (1.01) 1.28 1.26
-----------------------------------------------------------------------
Less Distributions:
Dividends from net investment income -- -- -- (0.01) --
Distributions from net realized gains (0.32) (0.09) (0.02) (0.24) --
-----------------------------------------------------------------------
Total distributions (0.32) (0.09) (0.02) (0.25) --
-----------------------------------------------------------------------
Net asset value at end of period $ 21.41 $ 16.82 $ 11.26 $ 12.29 $ 11.26
=======================================================================
Total return(C) 29.26% 50.18% (8.23%) 11.42%(D) 12.60%(D)
=======================================================================
Net assets at end of period (000s) $ 55,411 $ 11,919 $ 6,603 $ 5,315 $ 1,657
=======================================================================
Ratio of net expenses to average net assets 1.50% 1.50% 1.50% 1.58%(E) 1.75%(E)
Ratio of net investment income (loss)
to average net assets (0.35%) (0.57%) (0.70%) (0.35%)(E) 2.71%(E)
Ratio of gross expenses to average
net assets 1.51% 1.51% 1.53% 1.67%(E) 2.94%(E)
Portfolio turnover rate 30% 53% 49% 43%(E) 3%(E)
(A) Effective after the close of business on February 28, 2001, the Fund
changed its fiscal year-end to December 31.
(B) Class A commenced operations on December 29, 2000. The Fund did not open
to shareholders until February 7, 2001. Financial Highlights for the
period from December 29, 2000 to February 6, 2001, relate only to the
initial shareholder.
(C) Total returns shown exclude the effect of applicable sales charges.
(D) Not annualized.
(E) Annualized.
Year Ended Year Ended Year Ended Period Ended Period Ended
December 31, December 31, December 31, December 31, February 28,
Diamond Hill Small Cap Fund - Class C 2004 2003 2002 2001(A) 2001(B)
-----------------------------------------------------------------------
Net asset value at beginning of period $ 16.45 $ 11.09 $ 12.21 $ 11.26 $ 11.39
Income (loss) from investment operations:
Net investment loss (0.15) (0.18) (0.23) (0.05) --
Net realized and unrealized gains
(losses) on investments 4.81 5.63 (0.87) 1.24 (0.13)
-----------------------------------------------------------------------
Total from investment operations 4.66 5.45 (1.10) 1.19 (0.13)
-----------------------------------------------------------------------
Distributions from net realized gains (0.32) (0.09) (0.02) (0.24) --
-----------------------------------------------------------------------
Net asset value at end of period $ 20.79 $ 16.45 $ 11.09 $ 12.21 $ 11.26
=======================================================================
Total return(C) 28.40% 49.15% (9.02%) 10.66%(D) (1.14%)(D)
=======================================================================
Net assets at end of period (000s) $ 15,259 $ 7,213 $ 4,902 $ 1,284 $ 20
=======================================================================
Ratio of net expenses to average net assets 2.25% 2.25% 2.25% 2.26%(E) 2.50%(E)
Ratio of net investment income (loss)
to average net assets (1.20%) (1.35%) (1.40%) (1.15%)(E) 0.80%(E)
Ratio of gross expenses to average
net assets 2.26% 2.26% 2.28% 2.35%(E) 3.97%(E)
Portfolio turnover rate 30% 53% 49% 43%(E) 3%(E)
(A) Effective after the close of business on February 28, 2001, the Fund
changed its fiscal year-end to December 31.
(B) Class C commenced operations on February 20, 2001.
(C) Total returns shown exclude the effect of applicable sales charges.
(D) Not annualized.
(E) Annualized.
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2004 Page 37
Diamond Hill Funds
Financial Highlights
For a share outstanding throughout each period.
Year Ended Year Ended Year Ended Period Ended
December 31, December 31, December 31, December 31,
Diamond Hill Large Cap Fund - Class A 2004 2003 2002 2001(A)
-------------------------------------------------------
Net asset value at beginning of period $ 10.34 $ 7.87 $ 10.06 $ 10.00
-------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.02 0.04 0.04 0.01
Net realized and unrealized gains (losses)
on investments 2.16 2.47 (2.13) 0.06
-------------------------------------------------------
Total from investment operations 2.18 2.51 (2.09) 0.07
-------------------------------------------------------
Less Distributions:
Dividends from net investment income (0.01) (0.04) (0.04) (0.01)
Distributions from net realized gains -- -- (0.06) --
-------------------------------------------------------
Total distributions (0.01) (0.04) (0.10) (0.01)
-------------------------------------------------------
Net asset value at end of period $ 12.51 $ 10.34 $ 7.87 $ 10.06
=======================================================
Total return(B) 21.12% 31.92% (20.74%) 0.69%(C)
=======================================================
Net assets at end of period (000s) $ 17,369 $ 6,437 $ 3,300 $ 2,782
=======================================================
Ratio of net expenses to average net assets 1.40% 1.39% 1.40% 1.40%(D)
Ratio of net investment income to
average net assets 0.26% 0.62% 0.62% 0.38%(D)
Ratio of gross expenses to average net assets 1.42% 1.43% 1.46% 1.57%(D)
Portfolio turnover rate 13% 32% 71% 19%(D)
(A) Class A commenced operations on June 29, 2001.
(B) Total returns shown exclude the effect of applicable sales charges.
(C) Not annualized.
(D) Annualized.
Year Ended Year Ended Year Ended Period Ended
December 31, December 31, December 31, December 31,
Diamond Hill Large Cap Fund - Class C 2004 2003 2002 2001(A)
-------------------------------------------------------
Net asset value at beginning of period $ 10.23 $ 7.81 $ 10.06 $ 8.87
-------------------------------------------------------
Income (loss) from investment operations:
Net investment loss (0.04) -- -- (0.01)
Net realized and unrealized gains (losses)
on investments 2.12 2.42 (2.19) 1.20
-------------------------------------------------------
Total from investment operations 2.08 2.42 (2.19) 1.19
-------------------------------------------------------
Distributions from net realized gains -- -- (0.06) --
-------------------------------------------------------
Net asset value at end of period $ 12.31 $ 10.23 $ 7.81 $ 10.06
=======================================================
Total return(B) 20.33% 31.04% (21.73%) 13.42%(C)
=======================================================
Net assets at end of period (000s) $ 1,700 $ 871 $ 260 $ 262
=======================================================
Ratio of net expenses to average net assets 2.15% 2.14% 2.15% 2.15%(D)
Ratio of net investment loss to
average net assets (0.54%) (0.14%) (0.10%) (0.41%)(D)
Ratio of gross expenses to average net assets 2.17% 2.18% 2.81% 2.32%(D)
Portfolio turnover rate 13% 32% 71% 19%(D)
(A) Class C commenced operations on September 25, 2001.
(B) Total returns shown exclude the effect of applicable sales charges.
(C) Not annualized.
(D) Annualized.
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
Page 38 Diamond Hill Funds Annual Report December 31, 2004
Diamond Hill Funds
Financial Highlights
For a share outstanding throughout each period.
Year Ended Year Ended Year Ended Period Ended Period Ended
December 31, December 31, December 31, December 31, February 28,
Diamond Hill Focus Long-Short Fund - Class A 2004 2003 2002 2001(A) 2001(B)
-----------------------------------------------------------------------
Net asset value at beginning of period $ 11.75 $ 9.56 $ 10.67 $ 11.44 $ 10.00
-----------------------------------------------------------------------
Income (loss) from investment operations:
Net investment loss 0.00(C) (0.01) (0.06) (0.04) --
Net realized and unrealized gains
(losses) on investments 1.98 2.20 (1.05) (0.56) 1.44
-----------------------------------------------------------------------
Total from investment operations 1.98 2.19 (1.11) (0.60) 1.44
-----------------------------------------------------------------------
Distributions from net realized gains (0.06) -- -- (0.17) --
-----------------------------------------------------------------------
Net asset value at end of period $ 13.67 $ 11.75 $ 9.56 $ 10.67 $ 11.44
=======================================================================
Total return(D) 16.86% 22.91% (10.40%) (5.20%)(E) 14.43%(E)
=======================================================================
Net assets at end of period (000s) $ 47,008 $ 16,216 $ 11,518 $ 10,988 $ 10,352
=======================================================================
Ratio of net expenses to average net
assets, excluding dividends on securities
sold short 1.60% 1.59% 1.48% 1.67%(F) 1.75%(F)
Ratio of dividend expense on securities
sold short to average net assets 0.18% 0.11% 0.12% -- --
Ratio of net expenses to average net assets 1.78% 1.70% 1.60% 1.67%(F) 1.75%(F)
Ratio of net investment income (loss)
to average net assets 0.01% (0.07%) (0.39%) (0.46%)(F) (0.05%)(F)
Ratio of gross expenses to average net assets 1.79% 1.71% 1.63% 1.69%(F) 1.85%(F)
Portfolio turnover rate 18% 41% 46% 66%(F) 49%(F)
(A) Effective after the close of business on February 28, 2001, the Fund
changed its fiscal year-end to December 31.
(B) Class A commenced operations on June 30, 2000. The Fund did not open to
shareholders until August 3, 2000. Financial Highlights for the period
from June 30 to August 2, 2000, relate only to the initial shareholder.
(C) Amount rounds to less than $0.005.
(D) Total returns shown exclude the effect of applicable sales charges.
(E) Not annualized.
(F) Annualized.
Year Ended Year Ended Year Ended Period Ended Period Ended
December 31, December 31, December 31, December 31, February 28,
Diamond Hill Focus Long-Short Fund - Class C 2004 2003 2002 2001(A) 2001(B)
-----------------------------------------------------------------------
Net asset value at beginning of period $ 11.48 $ 9.42 $ 10.60 $ 11.44 $ 11.80
-----------------------------------------------------------------------
Income (loss) from investment operations:
Net investment loss (0.05) (0.04) (0.29) (0.07) --
Net realized and unrealized gains
(losses) on investments 1.89 2.10 (0.89) (0.60) (0.36)
-----------------------------------------------------------------------
Total from investment operations 1.84 2.06 (1.18) (0.67) (0.36)
-----------------------------------------------------------------------
Distributions from net realized gains (0.06) -- -- (0.17) --
-----------------------------------------------------------------------
Net asset value at end of period $ 13.26 $ 11.48 $ 9.42 $ 10.60 $ 11.44
=======================================================================
Total return(C) 16.04% 21.87% (11.13%) (5.81%)(D) (3.05%)(D)
=======================================================================
Net assets at end of period (000s) $ 20,810 $ 6,390 $ 2,168 $ 2,198 $ 349
=======================================================================
Ratio of net expenses to average net
assets, excluding dividends on securities
sold short 2.35% 2.34% 2.23% 2.38%(E) 2.50%(E)
Ratio of dividend expense on securities
sold short to average net assets 0.18% 0.11% 0.12% -- --
Ratio of net expenses to average net assets 2.53% 2.45% 2.35% 2.38%(E) 2.50%(E)
Ratio of net investment income (loss)
to average net assets (0.73%) (0.75%) (1.15%) (1.15%)(E) 1.57%(E)
Ratio of gross expenses to average net assets 2.54% 2.46% 2.38% 2.41%(E) 4.10%(E)
Portfolio turnover rate 18% 41% 46% 66%(E) 49%(E)
(A) Effective after the close of business on February 28, 2001, the Fund
changed its fiscal year-end to December 31.
(B) Class C commenced operations on February 13, 2001.
(C) Total returns shown exclude the effect of applicable sales charges.
(D) Not annualized.
(E) Annualized.
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2004 Page 39
Diamond Hill Funds
Financial Highlights
For a share outstanding throughout each period.
Year Ended Year Ended Year Ended Period Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, February 28, February 29,
Diamond Hill Bank & Financial Fund - Class A 2004 2003 2002 2001(A) 2001 2000
------------------------------------------------------------------------------------
Net asset value at beginning of period $ 17.92 $ 13.63 $ 14.25 $ 11.85 $ 9.40 $ 10.72
------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income (loss) 0.13 0.07 0.03 -- (0.02) (0.06)
Net realized and unrealized gains
(losses) on investments 2.84 5.60 1.58 2.40 2.47 (1.19)
------------------------------------------------------------------------------------
Total from investment operations 2.97 5.67 1.61 2.40 2.45 (1.25)
------------------------------------------------------------------------------------
Less Distributions:
Dividends from net investment income (0.13) (0.06) (0.03) -- -- --
Distributions from net realized gains (1.66) (1.32) (2.20) -- -- (0.07)
------------------------------------------------------------------------------------
Total distributions (1.79) (1.38) (2.23) -- -- (0.07)
------------------------------------------------------------------------------------
Net asset value at end of period $ 19.10 $ 17.92 $ 13.63 $ 14.25 $ 11.85 $ 9.40
====================================================================================
Total return(B) 16.67% 41.85% 11.22% 20.25%(C) 26.06% (11.75%)
====================================================================================
Net assets at end of period (000s) $ 20,682 $ 12,463 $ 9,983 $ 13,214 $ 11,772 $ 9,411
====================================================================================
Ratio of net expenses to average net assets 1.70% 1.68% 1.70%(D) 1.72% 1.81% 2.17%
Ratio of net investment income (loss)
to average net assets 0.90% 0.45% 0.20% (0.03%)(D) (0.25%) (0.40%)
Ratio of gross expenses to average net assets 1.71% 1.70% 1.72% 1.74%(D) 1.88% 2.26%
Portfolio turnover rate 36% 53% 104% 52%(D) 142% 119%
(A) Effective after the close of business on February 28, 2001, the Fund
changed its fiscal year end to December 31.
(B) Total returns shown exclude the effect of applicable sales charges.
(C) Not annualized.
(D) Annualized.
Year Ended Year Ended Year Ended Period Ended Year Ended Period Ended
December 31, December 31, December 31, December 31, February 28, February 29,
Diamond Hill Bank & Financial Fund - Class C 2004 2003 2002 2001(A) 2001 2000(B)
------------------------------------------------------------------------------------
Net asset value at beginning of period $ 17.39 $ 13.31 $ 14.05 $ 11.72 $ 9.34 $ 11.23
------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income (loss) 0.03 (0.06) 0.04 (0.11) (0.07) (0.05)
Net realized and unrealized gains
(losses) on investments 2.70 5.46 1.46 2.44 2.45 (1.77)
------------------------------------------------------------------------------------
Total from investment operations 2.73 5.40 1.50 2.33 2.38 (1.82)
------------------------------------------------------------------------------------
Less Distributions:
Dividends from net investment income (0.04) -- (0.04) -- -- --
Distributions from net realized gains (1.66) (1.32) (2.20) -- -- (0.07)
------------------------------------------------------------------------------------
Total distributions (1.70) (1.32) (2.24) -- -- (0.07)
------------------------------------------------------------------------------------
Net asset value at end of period $ 18.42 $ 17.39 $ 13.31 $ 14.05 $ 11.72 $ 9.34
====================================================================================
Total return(C) 15.79% 40.85% 10.55% 19.88%(D) 25.48% (16.29%)(D)
====================================================================================
Net assets at end of period (000s) $ 3,941 $ 1,974 $ 787 $ 127 $ 129 $ 71
====================================================================================
Ratio of net expenses to average net assets 2.45% 2.45% 2.45% 2.47%(E) 2.56% 2.74%(E)
Ratio of net investment income (loss)
to average net assets 0.20% (0.30%) (0.49%) (0.77%)(E) (0.97%) (0.82%)(E)
Ratio of gross expenses to average
net assets 2.46% 2.47% 2.47% 2.49%(E) 2.63% 2.84%(E)
Portfolio turnover rate 36% 53% 104% 52%(E) 142% 119%(E)
(A) Effective after the close of business on February 28, 2001, the Fund
changed its fiscal year end to December 31.
(B) Class C commenced operations on June 3, 1999.
(C) Total returns shown exclude the effect of applicable sales charges.
(D) Not annualized.
(E) Annualized.
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
Page 40 Diamond Hill Funds Annual Report December 31, 2004
Diamond Hill Funds
Financial Highlights
For a share outstanding throughout each period.
Class A Class C
---------------------------------------- ----------------------------------------
Year Ended Year Ended Period Ended Year Ended Year Ended Period Ended
December 31, December 31, December 31, December 31, December 31, December 31,
Diamond Hill Strategic Income Fund 2004 2003 2002(A) 2004 2003 2002(A)
---------------------------------------- ----------------------------------------
Net asset value at beginning of period $ 11.58 $ 10.28 $ 10.00 $ 11.58 $ 10.28 $ 10.00
---------------------------------------- ----------------------------------------
Income from investment operations:
Net investment income 0.64 0.67 0.15 0.56 0.60 0.19
Net realized and unrealized gains
on investments 0.19 1.39 0.30 0.19 1.39 0.30
---------------------------------------- ----------------------------------------
Total from investment operations 0.83 2.06 0.45 0.75 1.99 0.49
---------------------------------------- ----------------------------------------
Less distributions:
Dividends from net investment income (0.64) (0.67) (0.15) (0.56) (0.60) (0.19)
Distributions from net realized
gains (0.14) (0.09) (0.02) (0.14) (0.09) (0.02)
---------------------------------------- ----------------------------------------
Total distributions (0.78) (0.76) (0.17) (0.70) (0.69) (0.21)
---------------------------------------- ----------------------------------------
Net asset value at end of period $ 11.63 $ 11.58 $ 10.28 $ 11.63 $ 11.58 $ 10.28
======================================== ========================================
Total return(B) 7.46% 20.67% 4.49%(C) 6.70% 19.86% 4.85%(C)
======================================== ========================================
Net assets at end of period (000s) $ 31,274 $ 17,923 $ 2,092 $ 15,560 $ 8,428 $ 94
======================================== ========================================
Ratio of net expenses to average net assets 1.20% 1.19% 1.20%(D) 1.95% 1.93% 1.95%(D)
Ratio of net investment income to
average net assets 5.75% 6.01% 1.76%(D) 5.02% 5.39% 2.64%(D)
Ratio of gross expenses to average
net assets 1.21% 1.21% 1.23%(D) 1.96% 1.95% 1.98%(D)
Portfolio turnover rate 84% 83% 77%(D) 84% 83% 77%(D)
(A) Represents the period from commencement of operations (September 30, 2002)
through December 31, 2002.
(B) Total returns shown exclude the effect of applicable sales charges.
(C) Not annualized.
(D) Annualized.
Class A Class I
---------------------------------------- ----------------------------------------
Year Ended Year Ended Period Ended Year Ended Year Ended Period Ended
December 31, December 31, December 31, December 31, December 31, December 31,
Diamond Hill Short Term Fixed Income Fund 2004 2003 2002(A) 2004 2003 2002(A)
---------------------------------------- ----------------------------------------
Net asset value at beginning of period $ 10.01 $ 10.08 $ 10.00 $ 10.00 $ 10.08 $ 10.00
---------------------------------------- ----------------------------------------
Income from investment operations:
Net investment income 0.28 0.27 0.18 0.30 0.31 0.19
Net realized and unrealized gains
(losses) on investments (0.08) (0.07) 0.08 (0.07) (0.08) 0.08
---------------------------------------- ----------------------------------------
Total from investment operations 0.20 0.20 0.26 0.23 0.23 0.27
---------------------------------------- ----------------------------------------
Less distributions:
Dividends from net investment income (0.22) (0.27) (0.18) (0.26) (0.31) (0.19)
Dividends in excess of net
investment income (0.05) -- -- (0.04) -- --
---------------------------------------- ----------------------------------------
Total distributions (0.27) (0.27) (0.18) (0.30) (0.31) (0.19)
---------------------------------------- ----------------------------------------
Net asset value at end of period $ 9.94 $ 10.01 $ 10.08 $ 9.93 $ 10.00 $ 10.08
======================================== ========================================
Total return(B) 2.04% 2.04% 2.60%(C) 2.29% 2.29% 2.70%(C)
======================================== ========================================
Net assets at end of period (000s) $ 291 $ 473 $ 719 $ 8,321 $ 5,558 $ 2,407
======================================== ========================================
Ratio of net expenses to average
net assets 1.00% 1.00% 1.00%(D) 0.75% 0.75% 0.75%(D)
Ratio of net investment income to
average net assets 2.31% 2.79% 3.61%(D) 2.54% 3.29% 3.74%(D)
Ratio of gross expenses to average
net assets 1.03% 1.06% 1.04%(D) 0.79% 0.81% 0.79%(D)
Portfolio turnover rate 82% 118% 71%(D) 82% 118% 71%(D)
(A) Represents the period from commencement of operations (June 28, 2002)
through December 31, 2002.
(B) Total returns shown exclude the effect of applicable sales charges.
(C) Not annualized.
(D) Annualized.
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2004 Page 41
Diamond Hill Funds
Notes to Financial Statements
December 31, 2004
Organization
The Diamond Hill Small Cap Fund ("Small Cap Fund"), Diamond Hill Large Cap Fund
("Large Cap Fund"), Diamond Hill Focus Long-Short Fund ("Focus Fund"), Diamond
Hill Bank & Financial Fund ("Bank & Financial Fund"), Diamond Hill Strategic
Income Fund ("Strategic Income Fund") and Diamond Hill Short Term Fixed Income
Fund ("Short Term Fixed Income Fund"), are each a series of the Diamond Hill
Funds (the "Trust") (each a "Fund" and collectively the "Funds"). The Trust is
an Ohio business trust, which is registered under the Investment Company Act of
1940, as amended, (the "1940 Act") as an open-end, management investment
company. Each Fund is a diversified series of the Trust. The Small Cap Fund,
Large Cap Fund, Focus Fund, Bank & Financial Fund, and Strategic Income Fund are
each authorized to offer Class I shares but have not commenced operations as of
the date of this report.
The Funds offer two classes of shares (Class A and Class C, except for the Short
Term Fixed Income Fund which offers Class A and Class I shares). Each class of
shares for each Fund has identical rights and privileges except with respect to
distribution (12b-1) and service fees, voting rights on matters affecting a
single class of shares and the exchange privileges of each class of shares.
Significant Accounting Policies
The following is a summary of the Funds' significant accounting policies:
Estimates -- The preparation of financial statements in conformity with U.S.
generally accepted accounting principles ("GAAP") requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of income and expenses during
the reporting period. Actual results could differ from those estimates.
Security valuation -- Listed securities for which market quotations are readily
available are valued at the closing prices as determined by the primary exchange
where the securities are traded. Unlisted securities or listed securities for
which the latest sales prices are not readily available are valued at the
closing bid price in the principal market where such securities are normally
traded. Debt securities are valued on the basis of valuations provided by
dealers or by an independent pricing service that determines valuations based
upon market transactions for normal, institutional-size trading units of similar
securities. Short-term investments maturing in less than 61 days are valued at
amortized cost, which approximates market. Securities or other assets for which
the above valuation procedures are inappropriate or deemed not to reflect fair
value are valued at fair value as determined in good faith in accordance with
procedures approved by the Board of Trustees.
Short sales -- The Focus Fund, Bank & Financial Fund and Strategic Income Fund
may sell a security they do not own in anticipation of a decline in the value of
that security. When the Funds sell a security short, they must borrow the
security sold short and deliver it to the broker-dealer through which they made
the short sale. A gain, limited to the price at which the Funds sold the
security short, or a loss, unlimited in size, will be recognized upon closing a
short sale. Cash received from short sales is maintained by brokers and is used
to meet margin requirements for short calls. It is included as "Deposits with
brokers for securities sold short" on the Statements of Assets & Liabilities.
Repurchase agreements -- In connection with transactions in repurchase
agreements, it is each Fund's policy that its custodian take possession of the
underlying collateral securities, the fair value of which exceeds the principal
amount of the repurchase transaction, including accrued interest, at all times.
If the seller defaults, and the fair value of the collateral declines,
realization of the collateral by the Funds may be delayed or limited.
Security transactions -- Changes in holdings of portfolio securities shall be
reflected no later than in the first calculation on the first business day
following trade date. However, for financial reporting purposes, portfolio
security transactions are reported on trade date.The specific identification
method is used for determining realized gains or losses for financial statements
and income tax purposes. Dividend income is recognized on the ex-dividend date
and interest income is recognized on an accrual basis. Discount and premium on
securities purchased are amortized using the daily effective yield method.
Share valuation -- The net asset value per share of each class of shares of each
Fund is calculated daily by dividing the total value of a Fund's assets
attributable to that class, less liabilities attributable to that class, by the
number of shares of that class outstanding.
- --------------------------------------------------------------------------------
Page 42 Diamond Hill Funds Annual Report December 31, 2004
Diamond Hill Funds
Notes to Financial Statements (Continued)
December 31, 2004
Federal income taxes -- Each Fund's policy is to continue to comply with the
requirements of the Internal Revenue Code that are applicable to regulated
investment companies and to distribute substantially all of its taxable net
investment income and any net realized capital gains to its
shareholders. Therefore, no federal income tax provision is required.
Distributions to shareholders -- Dividends from net investment income are
declared and paid monthly for the Strategic Income Fund and Short Term Fixed
Income Fund. Prior to November 1, 2004, dividends from net investment income
were declared daily and paid monthly for the Strategic Income Fund and Short
Term Fixed Income Fund. Dividends from net investment income are declared and
paid on an annual basis for the Small Cap Fund, Large Cap Fund, Focus Fund, and
Bank & Financial Fund. Dividends are declared separately for each class. No
class has preferential dividend rights; differences in per share rates are due
to differences in separate class expenses. Net realized capital gains, if any,
are distributed at least annually. Distributions from net investment income and
from net capital gains are determined in accordance with U.S. income tax
regulations, which may differ from GAAP in the United States. These differences
are primarily due to differing treatments for paydown gains and losses on
mortgage-backed securities, expiring capital loss carry-forwards, and deferrals
of certain losses. Permanent book and tax basis differences are reclassified
among the components of net assets. Certain funds may utilize earnings and
profits distributed to shareholders on redemption of shares as part of the
dividends paid deduction for income tax purposes.
Allocations -- Investment income earned, realized capital gains and losses, and
unrealized appreciation and depreciation for the Funds are allocated daily to
each class of shares based upon its proportionate share of total net assets of
the Fund. Class specific expenses are charged directly to the class incurring
the expense. Common expenses, which are not attributable to a specific class,
are allocated daily to each class of shares based upon its proportionate share
of total net assets of the Fund. Expenses not directly billed to a Fund are
allocated proportionally among all Funds daily in relation to net assets of each
Fund or another reasonable measure.
Investment Transactions
For the year ended December 31, 2004, the purchases and sales (including
maturities) of investment securities (excluding short-term securities and U.S.
government obligations) were as follows:
Purchases Sales
------------ ------------
Small Cap Fund $ 30,926,607 $ 6,857,453
Large Cap Fund $ 8,949,045 $ 1,359,220
Focus Fund $ 32,031,349 $ 5,383,456
Bank & Financial Fund $ 10,517,971 $ 5,310,527
Strategic Income Fund $ 40,447,448 $ 24,617,955
Short Term Fixed Income Fund $ 4,826,147 $ 3,920,862
Investment Advisory Fees and Other Transactions with Affiliates
The Small Cap Fund, Large Cap Fund, Focus Fund, Strategic Income Fund, and Short
Term Fixed Income Fund each receive investment management and advisory services
from Diamond Hill Capital Management, Inc. ("DHCM") under management agreements
that provide for fees to be paid at an annual rate of 0.80%, 0.70%, 0.90%, 0.50%
and 0.30% of the Funds' average daily net assets, respectively. Prior to April
30, 2004, the Bank & Financial Fund received investment management and advisory
services from Diamond Hill Securities, Inc. ("DHS") under a management agreement
that provided for fees to be paid at an annual rate of 1.00% of the Fund's
average daily net assets. Effective April 30, 2004, the Bank & Financial Fund
receives investment management and advisory services from DHCM under a
management agreement that provides for fees to be paid at an annual rate of
1.00% of the Fund's average daily net assets. The advisory agreements are
subject to annual approval by the Board of Trustees. In addition, each Fund has
entered into an administrative services agreement whereby DHCM ("Administrator")
is paid a fee at an annual rate of 0.45% of each Funds' average daily net
assets. These administrative fees are used to pay most of the Funds' operating
expenses except brokerage, taxes, interest, dividend expense on securities sold
short, fees and expenses of non-interested person Trustees, and extraordinary
expenses. For the year ended December 31, 2004, the investment advisers
reimbursed each Fund's trustee fees of $2,500.
DHS is a wholly-owned subsidiary of DHCM (a Registered Investment Adviser),
which is a wholly-owned subsidiary of Diamond Hill Investment Group, Inc. During
the time it served as Investment Adviser, DHS was a full service NASD
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2004 Page 43
Diamond Hill Funds
Notes to Financial Statements (Continued)
December 31, 2004
Broker-Dealer and Registered Investment Adviser. For the year ended December 31,
2004, DHS did not receive any commissions from brokerage fees on executions of
purchases and sales of the Funds' portfolio investments.
Pursuant to rule 12b-1 of the 1940 Act, each Fund has adopted a distribution
plan (together, the "Plans"). Under the Plans, Class A shares pay a distribution
fee at an annual rate of 0.25% of Class A average daily net assets. Class C
shares pay a distribution and shareholder-servicing fee at an annual rate of
0.75% and 0.25%, respectively, of Class C average daily net assets. Class I
shares are not subject to any distribution or shareholder-servicing fees. Prior
to April 30, 2004, these fees compensated DHS (the prior "Distributor") for the
services it provided and for expenses borne under the Plans. Effective April 30,
2004, these fees, which totaled $599,699 for the year ended December 31, 2004,
compensate IFS Fund Distributors, Inc. (the new "Distributor") for the services
it provides and for expenses borne under the Plans.
For the year ended December 31, 2004, the prior Distributor and new Distributor
received $11,406, $2,529, $20,530, $9,575, and $11,594, in sales commissions
from the sales of Class A shares of the Small Cap Fund, Large Cap Fund, Focus
Fund, Bank & Financial Fund, and Strategic Income Fund, respectively. The prior
Distributor and new Distributor also received $1,399, $520, $2,236, $1,085, and
$9,822 of contingent deferred sales charges relating to redemptions of Class C
shares of the Small Cap Fund, Large Cap Fund, Focus Fund, Bank & Financial Fund,
and Strategic Income Fund, respectively.
DHCM has an agreement with Integrated Fund Services, Inc. ("IFS") to provide
sub-transfer agent, sub-fund accounting, and sub-administrative services for the
Funds. The services to be provided under the agreements include day-to-day
administration of matters related to the corporate existence of the Trust and
its Funds (other than rendering investment advice), maintenance of books and
records, preparation of reports, supervision of the Trust's arrangement with the
custodian and assistance in the preparation of the Trust's registration
statement under federal and state laws. IFS is paid directly by DHCM under terms
of these service agreements.
The Small Cap Fund, Large Cap Fund, Focus Fund, Bank & Financial Fund, and
Strategic Income Fund each may invest up to 25% of their respective assets in
the Short Term Fixed Income Fund, subject to compliance with the several
conditions set forth in an order received by the Trust from the Securities and
Exchange Commission. To the extent that the other Diamond Hill Funds are
invested in the Short Term Fixed Income Fund, the Adviser and Administrator will
be paid additional fees from the Short Term Fixed Income Fund that will not be
waived or reimbursed.
Certain officers of the Trust are affiliated with the Adviser, the Administrator
and the Distributor. Such officers receive no compensation from the Funds for
serving in their respective roles.
Commitments and Contingencies
The Funds indemnify the Trust's officers and Trustees for certain liabilities
that might arise from their performance of their duties to the Funds.
Additionally, in the normal course of business, the Funds enter into contracts
that contain a variety of representations and warranties and which provide
general indemnifications. The Funds' maximum exposure under these arrangements
is unknown, as this would involve future claims that may be made against the
Funds that have not yet occurred. However, based on experience, the Funds expect
the risk of loss to be remote.
Federal Tax Information
The amount and character of income and capital gain distributions paid by the
Funds are determined in accordance with Federal income tax regulations which may
be different from GAAP. The tax character of distributions paid differs from the
character of distributions shown on the Statements of Changes in Net Assets due
primarily to short-term capital gains being treated as ordinary income for tax
purposes and the use of tax equalization.
The tax character of distributions paid during 2004 and 2003 was as follows:
Small Cap Fund Large Cap Fund
------------------------ ------------------------
2004 2003 2004 2003
------------------------ ------------------------
Distributions paid from:
Ordinary income $ -- $ 98,800 $ 19,316 $ 26,642
Long-term capital gains 1,076,659 -- -- --
------------------------ ------------------------
Total distributions $1,076,659 $ 98,800 $ 19,316 $ 26,642
------------------------ ------------------------
- --------------------------------------------------------------------------------
Page 44 Diamond Hill Funds Annual Report December 31, 2004
Diamond Hill Funds
Notes to Financial Statements (Continued)
December 31, 2004
Focus Fund Bank & Financial Fund
------------------------ ------------------------
2004 2003 2004 2003
------------------------ ------------------------
Distributions paid from:
Ordinary income $ -- $ -- $ 501,632 $ 152,130
Long-term capital gains 278,162 -- 1,850,777 873,146
------------------------ ------------------------
Total distributions $ 278,162 $ -- $2,352,409 $1,025,276
------------------------ ------------------------
Short Term
Strategic Income Fund Fixed Income Fund
------------------------ ------------------------
2004 2003 2004 2003
------------------------ ------------------------
Distributions paid from:
Ordinary income $2,213,360 $ 907,384 $ 200,409 $ 115,975
Long-term gains 220,391 -- -- --
------------------------ ------------------------
Total distributions $2,433,751 $ 907,384 $ 200,409 $ 115,975
------------------------ ------------------------
The following information is computed on a tax basis for each item as of
December 31, 2004:
Short Term
Bank & Strategic Fixed
Small Large Focus Financial Income Income
Cap Fund Cap Fund Fund Fund Fund Fund
- -----------------------------------------------------------------------------------------------------------------------------------
Federal tax cost $ 53,063,005 $ 15,610,424 $ 56,795,118 $ 20,231,461 $ 45,393,540 $ 8,530,478
--------------------------------------------------------------------------------------------
Gross unrealized appreciation $ 12,971,304 $ 3,902,282 $ 12,230,566 $ 4,394,312 $ 1,650,750 $ 22,975
Gross unrealized depreciation (253,696) (90,745) (4,033,936) (111,027) (245,218) (18,046)
--------------------------------------------------------------------------------------------
Net unrealized appreciation 12,717,608 3,811,537 8,196,630 4,283,285 1,405,532 4,929
Undistributed ordinary income -- -- -- 26,252 -- 618
Undistributed long-term gains 331,221 -- -- 101,812 -- --
Post-October losses -- -- (9,437) -- (34,238) (4,353)
Capital loss carryforwards -- (288,939) -- -- -- (49,161)
Other temporary differences -- (15) -- -- (41,830) (4)
--------------------------------------------------------------------------------------------
Total accumulated earnings (deficit) $ 13,048,829 $ 3,522,583 $ 8,187,193 $ 4,411,349 $ 1,329,464 $ (47,971)
--------------------------------------------------------------------------------------------
The difference between book basis and tax basis net unrealized appreciation is
attributable primarily to the tax deferral of losses on wash sales.
Reclassification of capital accounts - Reclassifications result primarily from
the difference in the tax treatment of net investment losses and paydown gains
and losses. These reclassifications have no impact on the net assets or net
asset value of the Funds and are designed to present the Funds' capital accounts
on a tax basis:
Undistributed Accumulated
Paid-In Net Investment Net Realized
Capital Income Gains (Losses)
--------------------------------------------
Small Cap Fund $ 38,266 $ 185,367 $ (223,633)
Focus Fund (77,532) 78,231 (699)
Bank & Financial Fund 296,859 (269) (296,590)
Strategic Income Fund 48,457 (26,586) (21,871)
Short Term Fixed Income Fund -- 30,374 (30,374)
During the year ended December 31, 2004, the Small Cap Fund, Large Cap Fund and
Focus Fund utilized capital loss carryforwards of $146,403, $137,017 and
$214,697, respectively. As of December 31, 2004, the Funds had the following
capital loss carryforwards for Federal income tax purposes:
Fund Amount Expires December 31,
----------------------------------------------------------------------
Large Cap Fund $ 281,943 2010
6,996 2011
--------------
$ 288,939
--------------
Short Term Fixed Income Fund $ 2,710 2010
4,660 2011
41,791 2012
--------------
$ 49,161
--------------
Subsequent Event
On January 31, 2005, the Large Cap Fund, Focus Fund and Strategic Income Fund
commenced operations of Class I shares.
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2004 Page 45
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Trustees
of the Diamond Hill Funds
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of the Diamond Hill Funds (comprising the Diamond
Hill Focus Long-Short Fund, Diamond Hill Small Cap Fund, Diamond Hill Large Cap
Fund, Diamond Hill Bank & Financial Fund, Diamond Hill Short Term Fixed Income
Fund, and Diamond Hill Strategic Income Fund) (collectively, the "Funds") as of
December 31, 2004, and the related statements of operations for the year then
ended, and the statements of changes in net assets and financial highlights for
each of the two years in the period then ended. These financial statements and
financial highlights are the responsibility of the Funds' management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The financial highlights presented for
the periods ended December 31, 2002 and 2001, and February 28, 2001 and February
29, 2000 were audited by other auditors whose reports dated January 17, 2003 and
March 20, 2001, expressed unqualified opinions on those financial highlights.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Funds'
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements and financial
highlights, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
Our procedures included confirmation of securities owned as of December 31, 2004
by correspondence with the custodian and brokers. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Diamond Hill Funds as of December 31, 2004, and the results of their operations
for the year then ended, and the changes in their net assets and financial
highlights for each of the two years in the period then ended in conformity with
U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Cincinnati, Ohio
February 7, 2005
- --------------------------------------------------------------------------------
Page 46 Diamond Hill Funds Annual Report December 31, 2004
Diamond Hill Funds
Other Items (Unaudited)
December 31, 2004
Dividends Received Deduction
For corporate shareholders, the following ordinary dividends paid during the
year ended December 31, 2004 qualify for the corporate dividends received
deduction:
Large Cap Fund 100%
Bank & Financial Fund 93%
Strategic Income Fund 68%
Proxy Voting
The investment adviser is responsible for exercising the voting rights
associated with the securities purchased and held by the Funds. A description of
the policies and procedures that the Adviser uses in fulfilling this
responsibility and information regarding how those proxies were voted during the
twelve month period ended June 30, 2004 are available without charge upon
request by calling toll free 1-888-226-5595 or on the Securities and Exchange
Commission's website at http://www.sec.gov.
Quarterly Portfolio Disclosure
The Trust files a complete listing of portfolio holdings as of the end of the
first and third quarters of each fiscal year on Form N-Q beginning with the
September 2004 quarter. The complete listing (i) is available on the
Commission's website; (ii) may be reviewed and copied at the Commission's
Public Reference Room in Washington, DC; and (iii) will be made available to
shareholders upon request by calling 1-888-226-5595. Information on the
operation of the Public Reference Room may be obtained by calling
1-800-SEC-0330. Quarterly portfolio holdings are also available on
www.diamond-hill.com.
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2004 Page 47
Diamond Hill Funds
Schedule of Shareholder Expenses
Hypothetical Example of a $1,000 Investment at Beginning of Period
(Unaudited)
All mutual funds have operating expenses. These expenses include costs for
portfolio management, administrative services, and distribution fees. Operating
expenses, which are deducted from a fund's gross income, directly reduce the
investment return of the fund. A fund's expenses are expressed as a percentage
of its net assets. This figure is known as the expense ratio.
We believe it is important for you to understand the impact of costs on your
investment. The following example illustrates the costs that you would incur
over the six-month period ended December 31, 2004 if you invested $1,000 in the
Funds, using the Funds' actual returns and operating expenses for the six months
ended December 31, 2004. The examples use actual net operating expenses
applicable to that class. The calculation does not reflect sales charges
(loads). If this cost was included, your costs would have been higher. The
examples contain two sets of numbers, one using the actual return earned by each
class of each Fund during the six months ended December 31, 2004, and one using
a hypothetical 5% annual return (2.5% for the reporting period).
Net Expense Total Return Beginning Ending
Ratio Six Months Account Account
Annualized Ended Value Value Investment Distribution/
December 31, December 31, July 1, December 31, Advisory Administration Service Total Net
2004 2004 2003 2004 Fees Fees Fees Expenses
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Fund
Class A Actual 1.50% 17.02% $ 1,000.00 $ 1,170.20 $ 4.36 $ 2.46 $ 1.36 $ 8.18
Hypothetical 1.50% 2.50% $ 1,000.00 $ 1,017.60 $ 4.06 $ 2.28 $ 1.27 $ 7.61
Class C Actual 2.25% 16.69% $ 1,000.00 $ 1,166.90 $ 4.36 $ 2.45 $ 5.45 $ 12.26
Hypothetical 2.25% 2.50% $ 1,000.00 $ 1,013.83 $ 4.05 $ 2.27 $ 5.07 $ 11.39
Large Cap Fund
Class A Actual 1.40% 11.92% $ 1,000.00 $ 1,119.20 $ 3.73 $ 2.40 $ 1.33 $ 7.46
Hypothetical 1.40% 2.50% $ 1,000.00 $ 1,018.10 $ 3.55 $ 2.28 $ 1.27 $ 7.10
Class C Actual 2.15% 11.50% $ 1,000.00 $ 1,115.00 $ 3.72 $ 2.39 $ 5.32 $ 11.43
Hypothetical 2.15% 2.50% $ 1,000.00 $ 1,014.33 $ 3.54 $ 2.28 $ 5.07 $ 10.89
Focus Long-Short Fund
Class A Actual 1.60% 10.56% $ 1,000.00 $ 1,105.60 $ 4.77 $ 2.38 $ 1.32 $ 8.47
Hypothetical 1.60% 2.50% $ 1,000.00 $ 1,017.09 $ 4.56 $ 2.28 $ 1.27 $ 8.11
Class C Actual 2.35% 10.18% $ 1,000.00 $ 1,101.80 $ 4.76 $ 2.38 $ 5.28 $ 12.42
Hypothetical 2.35% 2.50% $ 1,000.00 $ 1,013.32 $ 4.55 $ 2.28 $ 5.06 $ 11.89
Bank & Financial Fund
Class A Actual 1.70% 10.73% $ 1,000.00 $ 1,107.30 $ 5.30 $ 2.38 $ 1.33 $ 9.01
Hypothetical 1.70% 2.50% $ 1,000.00 $ 1,016.59 $ 5.07 $ 2.28 $ 1.27 $ 8.62
Class C Actual 2.45% 10.33% $ 1,000.00 $ 1,103.30 $ 5.29 $ 2.38 $ 5.28 $ 12.95
Hypothetical 2.45% 2.50% $ 1,000.00 $ 1,012.82 $ 5.06 $ 2.28 $ 5.06 $ 12.40
Strategic Income Fund
Class A Actual 1.20% 8.25% $ 1,000.00 $ 1,082.50 $ 2.62 $ 2.35 $ 1.31 $ 6.28
Hypothetical 1.20% 2.50% $ 1,000.00 $ 1,019.10 $ 2.54 $ 2.28 $ 1.27 $ 6.09
Class C Actual 1.95% 7.89% $ 1,000.00 $ 1,078.90 $ 2.61 $ 2.35 $ 5.23 $ 10.19
Hypothetical 1.95% 2.50% $ 1,000.00 $ 1,015.33 $ 2.53 $ 2.28 $ 5.07 $ 9.88
Short Term Fixed Income Fund
Class A Actual 1.00% 1.54% $ 1,000.00 $ 1,015.40 $ 1.52 $ 2.28 $ 1.27 $ 5.07
Hypothetical 1.00% 2.50% $ 1,000.00 $ 1,020.11 $ 1.52 $ 2.29 $ 1.27 $ 5.08
Class I Actual 0.75% 1.67% $ 1,000.00 $ 1,016.70 $ 1.52 $ 2.28 $ -- $ 3.80
Hypothetical 0.75% 2.50% $ 1,000.00 $ 1,021.37 $ 1.52 $ 2.29 $ -- $ 3.81
- --------------------
You can find more information about the Fund's expenses, including annual
expense ratios for historical periods in the Financial Statements section of
this report. For additional information on operating expenses and other
shareholder costs, please refer to the Funds' prospectus. The prospectus
presents hypothetical shareholder costs over various time periods based upon a
$10,000 investment and a return of 5% a year. This standardized example, which
appears in all mutual fund prospectuses, may be useful to you in comparing the
costs of investing in different funds.
- --------------------------------------------------------------------------------
Page 48 Diamond Hill Funds Annual Report December 31, 2004
Diamond Hill Funds
Management of the Trust (unaudited)
Listed in the charts below is basic information regarding the Trustees and
officers of the Trust.
TRUSTEES:
- ------------------------------------------------------------------------------------------------------------------------------------
Number of
Portfolios in Other Trusteeships
Name/ Position(s) Term of Office(1) Fund Complex Held by Trustee
Address/(3) Held with and Length of Principal Occupation(s) Overseen by Outside the Fund
Age Trust Time Served During Last 5 Years Trustee Complex
- ------------------------------------------------------------------------------------------------------------------------------------
John M. Bobb Trustee Since October 1997 Director of Headwaters Group, 6 N/A
Year of Birth: 1941 a fine arts consulting agency,
1994 to the present.
George A. Skestos Trustee Since August 2000 President of Homewood Corp., 6 Director of the Midland
Year of Birth: 1968 a real estate development Life Insurance Co.
firm, 1999 to the present.
Archie M. Griffin Trustee Since June 2001 President and CEO of The Ohio 6 Director of Abercrombie
Year of Birth: 1954 State Alumni Association, Inc., & Fitch. Director of
2004. Associate Director of Motorists Insurance.
Athletics at The Ohio State Director of the Ohio
University, 1994 to 2003. Automobile Club.
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OFFICERS:
- ------------------------------------------------------------------------------------------------------------------------------------
Name/
Address/(3) Position(s) Term of Office and Principal Occupation(s)
Age Held with Trust Length of Time Served During Last 5 Years
- ------------------------------------------------------------------------------------------------------------------------------------
James F. Laird, Jr.(2) President Since December 2001 Chief Financial Officer of Diamond Hill Investment
Year of Birth: 1957 Group, Inc., since December 2001. President of Diamond
Hill Securities since July 2001. Vice President
Corporate Strategy with Nationwide Insurance from
January 2001 to July 2001. Senior Vice President Product
Development with Villanova Capital from February 1999
through December 2000.
Gary R.Young(2) Treasurer, Secretary and Since May 2004 Controller of Diamond Hill Investment Group, Inc. since
Year of Birth: 1969 Chief Compliance Officer Since September 2004 April 2004. Director of Mutual Fund Administration with
Banc One Investment Advisors October 1998 through
November 2003. Vice President and Manager of Mutual Fund
Accounting and Financial Reporting with First Chicago
NBD January 1996 through October 1998.
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Each Trustee is elected to serve in accordance with the Declaration of
Trust and Bylaws of the Trust until his or her successor is duly elected
and qualified.
(2) Mr. Laird and Mr.Young are each an "interested person" of the Trust as
defined in the Investment Company Act of 1940, as amended, because of
their relationship with Diamond Hill Capital Management, Inc.
(3) The address of each Trustee and Officer is 375 North Front Street, Suite
300, Columbus, Ohio 43215.
The Statement of Additional Information contains additional information about
the Trustees and is available without charge on www.diamond-hill.com or by
calling 1-888-226-5595.
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2004 Page 49
DIAMOND HILL
-------------
funds
375 North Front Street, Suite 300
Columbus, Ohio 43215
614.255.3333
www.diamond-hill.
INVESTMENT ADVISER
Diamond Hill Capital
DISTRIBUTOR
IFS Fund Distributors,
FOR ADDITIONAL INFORMATION, CALL
Integrated Fund Services, Inc.
Toll Free 888.226.
Item 2. Code of Ethics.
As of the end of the period covered by this report, the registrant has adopted a
code of ethics that applies to the registrant's principal executive officer,
principal financial officer, principal accounting officer or controller, or
persons performing similar functions, regardless of whether these individuals
are employed by the registrant or a third party.
Item 3. Audit Committee Financial Expert.
The registrant's Board of Trustees has determined that the registrant does not
have an audit committee financial expert. The Trustees determined that no member
of the Audit Committee was qualified to be considered an audit committee
financial expert
Item 4. Principal Accountant Fees and Services.
(a) Audit Fees. Audit fees totaled $57,600 for the December 31, 2004 fiscal year
and $50,000 for the December 31, 2003 fiscal year, including fees associated
with the annual audit and filings of the registrant's Form N-1A and Form N-SAR.
(b) Audit-Related Fees. There were no audit-related fees for the December 31,
2004 or December 31, 2003 fiscal years.
(c) Tax Fees. Tax fees totaled $11,000 for the December 31, 2004 fiscal year
and $7,500 for the December 31, 2003 fiscal year and consisted of fees for tax
compliance services during both years.
(d) All Other Fees. There were no other fees for the December 31, 2004 or
December 31, 2003 fiscal years.
(e)(1) Audit Committee Pre-Approval Policies. The Audit Committee's pre-approval
policies describe the types of audit, audit-related, tax and other services that
may receive the general pre-approval of the Audit Committee. The pre-approval
policies provide that annual audit service fees, tax services not specifically
granted pre-approval, services exceeding pre-approved cost levels and other
services that have not received general pre-approval will be subject to specific
pre-approval by the Audit Committee. The pre-approval policies further provide
that the Committee may grant general pre-approval to other audit services
(statutory audits and services associated with SEC registration statements,
periodic reports and other documents filed with the SEC or other documents
issued in connection with securities offerings), audit-related services
(accounting consultations related to accounting, financial reporting or
disclosure matters not classified as "audit services," assistance with
understanding and implementing new accounting and financial reporting guidance
from rulemaking authorities, agreed-upon or expanded audit procedures related to
accounting and/or billing records required to respond to or comply with
financial, accounting or regulatory reporting matters and assistance with
internal control reporting requirements under Form N-SAR and Form N-CSR), tax
services that have historically been provided by the auditor that the Committee
believes would not impair the independence of the auditor and are consistent
with the SEC's rules on auditor independence and permissible non-audit services
classified as "all other services" that are routine and recurring services.
(e)(2) All services described in paragraphs (b) through (d) of Item 4 were
approved by the Audit Committee.
(f) Not applicable
(g) The aggregate non-audit fees for services to the registrant, its investment
adviser and any entity controlling, controlled by, or under common control with
the adviser that provides ongoing services to the registrant were $11,000 for
the fiscal year ended December 31, 2004 and $7,500 for the fiscal year ended
December 31, 2003, including services provided prior to September 23, 2004, the
effective date of the pre-approval process.
(h) Not applicable
Item 5. Audit Committee of Listed Companies.
Not applicable.
Item 6. Schedule of Investments.
The Schedule of Investments in securities of unaffiliated issuers is included in
the Annual Report.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers.
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders.
The registrant does not have procedures by which shareholders may recommend
nominees to its Board of Trustees.
Item 11. Controls and Procedures.
(a) Based on an evaluation of the registrant's disclosure controls and
procedures (as defined in Rule 30a-3(c) under the Investment Company Act of
1940), as of a date within 90 days of the filing date of this report, the
registrant's principal executive officer and principal financial officer have
concluded that the registrant's disclosure controls and procedures are
effective.
(b) There were no changes in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940)
that occurred during the registrant's last fiscal half-year that have materially
affected, or are reasonably likely to materially affect, the registrant's
internal control over financial reporting.
Item 12. Exhibits.
(a)(1) Code of Ethics for Senior Financial Officers is filed herewith
(a)(2) Certifications required by Item 12(a) of Form N-CSR are filed herewith.
(a)(3) Not applicable.
(b) Certification required by Item 12(b) of Form N-CSR is filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) Diamond Hill Funds
By (Signature and Title)
/s/ James F. Laird
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James F. Laird
President
Date: March 9, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)
/s/ James F. Laird
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James F. Laird
President
Date: March 9, 2004
By (Signature and Title)
/s/ Gary R. Young
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Gary R. Young.
Treasurer and Chief Financial Officer
Date: March 9, 2004