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: 12/31/05
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, 100 F Street, NE,
Washington, DC 20549. 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 Funds Annual Report
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Table of Contents
Letter to Shareholders 1
Mission Statement, Pledge, and Fundamental Principles 3
Special Investment Letter - In the Long Run 5
Management Discussion of Fund Performance
Diamond Hill Small Cap Fund 8
Diamond Hill Large Cap Fund 11
Diamond Hill Focus Long-Short Fund 13
Diamond Hill Bank & Financial Fund 15
Diamond Hill Strategic Income Fund 18
Financial Statements
Schedules of Investments 20
Statements of Assets & Liabilities 28
Statements of Operations 29
Statements of Changes in Net Assets 30
Schedule of Capital Share Transactions 33
Financial Highlights 34
Notes to Financial Statements 39
Report of Independent Registered Public Accounting Firm 44
Other Items 45
Schedule of Shareholder Expenses 47
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 Shareholder:
We are pleased to provide this 2005 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 as of December 31, 2005:
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Three Six One Three Five
Months Months Year Years Years
NAV Ended Ended Ended Ended Ended Since Inception
12/31/05 12/31/05 12/31/05 12/31/05 12/31/05 12/31/05 Inception Date
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Small Cap Fund (DHSCX) $23.95 2.25% 10.37% 12.90% 29.89% 20.34% 20.31% 12/29/00
Russell 2000 1.12% 5.87% 4.55% 22.13% 8.22% 8.20%
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Large Cap Fund (DHLAX) $14.44 2.00% 11.21% 16.19% 22.91% NA 9.12% 6/29/01
Russell 1000 2.12% 6.16% 6.27% 15.42% NA 2.83%
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Focus Long-Short Fund (DIAMX) $16.46 3.26% 13.18% 21.46% 20.38% 10.65% 10.07% 6/30/00
Russell 3000 2.04% 6.14% 6.12% 15.90% 1.58% -0.16%
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Bank & Financial Fund (BANCX) $18.48 4.47% 2.67% 0.25% 18.38% 17.99% 13.05% 8/1/97
S&P Supercomposite Financials(A) 7.86% 8.84% 6.62% 16.20% 4.15% 7.31%
NASDAQ Bank Index 2.43% 2.44% -1.93% 14.04% 12.29% 9.58%
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Strategic Income Fund (DSIAX) $11.25 -0.53% -0.36% 2.41% 9.93% NA 10.62% 9/30/02
Merril Lynch Domestic Master Index 0.59% -0.10% 2.55% 3.67% NA 3.87%
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Source: Diamond Hill Funds, Bloomberg LP and Frank Russell Company. Periods
greater than one year are annualized.
Returns are shown without sales charges but include all other expenses.
Standardized performance for each Fund is shown on pages 10-19.
(A) Returns for the S&P Supercomposite Financials are price change only before
November 29, 2001 and total return thereafter.
Equity Funds and Markets
The major U.S. equity indices in 2005 had positive, albeit below long-term
average, returns. In earlier communications with clients and shareholders, we
had expressed an opinion that returns in this decade might average 5 - 6%
compounded, a figure below the low double digit long-term compound average and
much lower than those experienced in the previous two decades. However, we
generally refrained from trying to predict the return in any one year. That the
results of 2005 came reasonably close to this prediction is, in our opinion,
more coincidence than sage prognostication. The performance of our Equity Funds
have met most of our long-term goals, and 2005 was for the most part, a stellar
year. In what has been an unattractive period for all-cap and large-cap indices,
the Focus Long-Short Fund and the Large Cap Fund have been able to achieve
returns on par with the long run historic averages. The Small Cap Fund has
surpassed goals for both absolute and relative returns by a wide margin.
Finally, while the financial sector faced headwinds in 2005, the longer-term
record of the Bank & Financial Fund is still quite favorable.
Of course, our focus is always on future performance. We are well aware that
many shareholders have made initial purchases in the Funds within the last two
years. Last year, Small Cap Fund assets increased from $71 million to $385
million, Focus Long-Short Fund assets increased from $68 million to $308
million, and Large Cap Fund assets increased from $19 million to $117 million.
The returns shown in mutual fund literature are always presented on a geometric,
time-weighted basis. Having achieved success in the past five years, our
challenge is to produce returns in the next five years that would also allow a
dollar-weighted return measurement to reflect positively.
We still believe investors in U.S. equity markets should be prepared for lower
real returns than what has occurred historically. One digression: when a low
return environment is predicted, conventional wisdom often prescribes focusing
on keeping costs down. Bill Gross, the PIMCO Total Return manager recommended
just that at the Morningstar conference in June 2005. The thinking must go that
if an investor is getting returns in the teens, a 1% fee does not seem all that
important. However, if returns are only 6%, a 1% fee seems outsized. Yet
consider two scenarios. The first describes the high-return environment of 1980
- - 1999. The S&P 500 total return was approximately 17.9%. Suppose a manager
matched the gross return of the index, but net of fees, trailed by 90 basis
points. Now suppose that over the next 20 years, the S&P 500 total return is
only 6.9%, and a manager once again matches the gross return, but trails by 90
basis points net of fees.
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Diamond Hill Funds Annual Report December 31, 2005 Page 1
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1/1/1980 20 Years @ 12/31/1999 Difference
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Index $10,000.00 17.9% $ 269,325 $38,269
Manager $10,000.00 17.0% $ 231,056
Hypothetical 1/1/2000 - 12/31/2019
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1/1/2000 20 Years @ 12/31/2019 Difference
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Index $10,000.00 6.9% $ 37,980 $ 5,909
Manager $10,000.00 6.0% $ 32,071
Thus, in regards to the terminal wealth measured in dollars, basis points are
even more important at higher rates of compound interest. Utility theory might
argue that the shortfall in the second example is more significant to the
investor than in the first example. After all, the first investor still
increased $10,000 to $231,056 in just twenty years. Still, the point is that
costs always matter, but paramount is what you receive in relation to the cost.
We suspect what Bill Gross meant is that he believed in a coming low return
environment for U.S. markets and opportunities for outperforming were relatively
scarce. It is difficult to predict when a perceived undervalued security might
work out well. Entering 2005, with the exception of energy, we held a belief of
both paucity and parity of value. Yet, the year was outstanding. Entering 2006,
we have a similar opinion, but 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.
Strategic Income Fund and Fixed Income Markets
The main focus for the fixed income markets, for the balance of 2005, was the
policy of the Federal Reserve. At each meeting, the federal funds rate was
raised and, at the end of the year, the rate stood at 4.25%. The bond market has
consistently viewed the Fed's actions as a positive, in terms of the Federal
Reserve trying to act proactively as a deterrent to inflation. For this reason,
as short-term rates continued to rise, long-term rates did not go up. The normal
analysis of a flattening yield curve is that the economy is weakening and that,
with an inverted yield curve to follow, the economy will soon slow enough to
produce a recession. Time will tell if that happens in the immediate future.
With a new Chairman of the Federal Reserve Board to take office at the end of
January, 2006 will probably be another year of "Fed watching", as market
participants try to determine what actions will be taken. We clearly are in the
stage of policy where public economic data will drive the direction of interest
rates. Today, the most likely forecast is that we will have a soft landing for
this economic recovery, very little inflation and a year of little change in
interest rates. This may well happen, but risks that higher input prices finally
get passed on to the consumer are still real and, if this happens, then
inflation is not dead and we have the risk of higher interest rates throughout
the year. In short, the bond market seems priced for perfection, but there still
seems to be enough risk in the market that a conservative investment approach
relative to duration and credit risk seems warranted.
Thank you again for your trust in the Diamond Hill Funds. As always, we will
work hard to continue to earn it. Best wishes for 2006.
/s/ Ric Dillon /s/ Charles S. Bath /s/ Kent A. Rinker
Ric Dillon, CFA Charles S. Bath, CFA Kent A. Rinker
Chief Investment Officer Managing Director - Equities Managing Director - Fixed Income
Co-Portfolio Manager Portfolio Manager Portfolio Manager
Diamond Hill Focus Long-Short Fund Diamond Hill Large Cap Fund Diamond Hill Strategic Income Fund
Diamond Hill Small Cap Fund Co-Portfolio Manager
Diamond Hill Focus Long-Short Fund
/s/ Christopher M. Bingaman /s/ Richard Moore
Christopher M. Bingaman, CFA Richard Moore, CFA
Portfolio Manager Investment Analyst - Fixed Income
Diamond Hill Bank & Financial Fund
/s/ Thomas P. Schindler /s/ William Zox
Thomas P. Schindler, CFA William Zox, CFA, J.D., LL.M.
Co-Portfolio Manager Investment Analyst - Fixed Income
Diamond Hill Small Cap Fund
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Page 2 Diamond Hill Funds Annual Report December 31, 2005
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Mission Statement, Pledge and Fundamental Principles
Mission
Our mission is to build and preserve wealth through a disciplined
intrinsic value approach, independent thinking and aligning our interests
with those of our clients.
o Disciplined intrinsic value approach - taking a stake in a company
as an owner or a lender, possessing the proper long-term investment
temperament and seeking investments selling at a discount to a
growing intrinsic value.
o Independent thinking - intellectual curiosity, healthy skepticism
and confidence in decisions that may be contrary to the norm.
"You are neither right nor wrong because the crowd disagrees with
you. You are right because your data and reasoning are right"
- Benjamin Graham
o Aligning our interests - mindful of our fiduciary duties to clients,
all of our Portfolio Managers are significant investors in the same
portfolios in which our clients invest.
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 you entrust to us with the same care that we
invest our own capital. To this end, Diamond Hill employees and affiliates
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 portfolio, 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.
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Diamond Hill Funds Annual Report December 31, 2005 Page 3
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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.
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 primary goal is to generate a yield greater than the current
rate of inflation without bearing undue credit or interest rate
risk. However, we cannot guarantee any specific yield.
o A flexible approach allows us to invest in both investment grade and
non-investment grade corporate bonds as well as preferred
securities, real estate investment trusts, master limited
partnerships, and closed end funds. We can also invest in securities
issued by the U.S. government and its agencies when conditions
warrant.
o We balance our income objective with a focus on total return. Over
the next five years, our objective is to earn equity-like returns in
the income markets with lower year-to-year volatility and, more
importantly, a much lower risk of permanent loss of capital.
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Page 4 Diamond Hill Funds Annual Report December 31, 2005
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Special Investment Letter -
"In the Long Run"
At Diamond Hill, our core investment tenets encourage independent,
businesslike, and long-term thinking. This piece discusses our thoughts on
what constitutes the long-term and some of its practical effects on our
investment approach.
The Eagles wrote a song about it. Every first year economics student learns to
define it. And investment organizations espouse it often enough that it might be
regarded as a cliche. "It" is the long run. In certain contexts, the long run
cannot be defined as a specific time frame. For instance, the economics student
learns that in the short run at least some costs are fixed, while in the long
run all costs are variable. Neither should self-interest be allowed to influence
an objective definition of long-term. Fund companies have an incentive to define
long-term as a very long time, perhaps forever. However, a skeptical mutual fund
observer could become downright cynical when considering the hypocrisy of fund
companies preaching long-term investing on the part of their shareholders, while
the fund managers themselves play a distinctly short-term game as evidenced by
portfolio turnover rates easily exceeding 100%. In the end, we may be able to do
no better than Supreme Court Justice Potter Stewart, who in writing a concurring
opinion in an early obscenity case refrained from giving specific definitions,
but stated "I know it when I see it." Legal scholars among you might know that
Stewart himself later recognized that the vagueness of his earlier opinion made
it untenable in a legal context. If, like Potter, we are too vague in our
definition of long-term, check back with us when we are represented on the
Supreme Court. In the meantime, hopefully this shares some thoughts on what
long-term investing means to us.
Classical Economics vs. Keynesian Economics
Debates about long-term and short-term are not new in the sphere of economic
policy and investing. Henry Hazlitt, in Economics in One Lesson, wrote "the art
of economics consists in looking not merely at the immediate but at the longer
effects of any act or policy; it consists in tracing the consequences of that
policy not merely for one group but for all groups." While Hazlitt thought some
might find this obvious, he assured readers that it was anything but orthodoxy:
Yet when we enter the field of public economics, these elementary truths
are ignored. There are men regarded today as brilliant economists, who
deprecate saving and recommend squandering on a national scale as the way
of economic salvation; and when anyone points to what the consequences of
these policies will be in the long run, they reply flippantly, as might
the prodigal son of a warning father: "In the long run we are all dead."
And such shallow wisecracks pass as devastating epigrams and the ripest
wisdom.
Here, the object of Hazlitt's disdain is John Maynard Keynes, who wrote, "But
this long run is a misleading guide to current affairs. In the long run we are
all dead. Economists set themselves too easy, too useless a task if in
tempestuous seasons they can only tell us that when the storm is long past the
ocean is flat again." Keynes had a very successful investment record and wrote
insightfully and eloquently about investor psychology. Also, his often quoted
"in the long run we are all dead" might be better kept in context as a reminder
that we must also live in the short term. Yet, in setting economic policy,
Keynes believed in government intervention to solve short-term
"disequilibriums," distrusting free markets and the price mechanism to do their
work. In short, if "problems" [lack of aggregate demand] were ever encountered,
somebody [the government] should DO SOMETHING. While a full discussion of
classical and Keynesian economics is well beyond the scope of this piece, we
think it is appropriate to keep in mind the seemingly trite Latin saying- primum
non nocere - "First, do no harm."
One story to place this in an investment perspective involves Diamond Hill's
Chuck Bath. In the 1990's, Chuck was interviewing with a Fund organization, now
part of a major multinational bank. As part of an idle conversation with a
manager in that organization, Chuck mentioned that the mutual fund he was then
managing had underperformed the previous week. That manager's immediate
question, "What are you going to do about it?" The answer, in deed if not words,
was nothing. Our approach is much the same today. Given that we believe
short-term stock price movements are as much a reflection of investor
psychology, we would not expect to engage in major portfolio overhauls in
reaction to such fluctuations.
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Diamond Hill Funds Annual Report December 31, 2005 Page 5
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A Short Term Investment Approach
Some might point out that the long-term is actually a series of short-terms.
This fact is explicit in fixed income markets, where investors might attempt to
predict the theoretical term structures of interest rates by considering a
series of forward zero-coupon curves in a process called bootstrapping. But is
there something to be gained in equity investing by predicting a series of
short-term events? Perhaps it would be useful to consider a short-term
investment approach, such as earnings surprises. This approach might best be
described as attempting to choose stocks that the manager believes will surpass
the "consensus estimate" in the next reported quarter. This approach has logical
aspects. If a stock is reasonably efficiently priced, then it should respond to
the marginal piece of news.
There are a few major drawbacks to this approach, however, in our view. First,
if a stock is inefficiently priced, why should it necessarily respond to
marginal news in the direction anticipated - higher if the news is good and
lower if bad? Second, there is great risk in concluding that the earnings
estimates of a few sell-side analysts are the actual expectations embedded in a
stock price. In his book Wall Street Meat, Andy Kessler relates a story from a
Microsoft analyst meeting in 1991. Kessler worked at Morgan Stanley covering
companies such as Intel, but did not cover PC software, so he was there only as
an interested observer. Amid presentations about Microsoft products, Microsoft
President Jon Shirley spoke:
"I want to comment about your earnings estimates. There are certain
analysts out there, and you know who you are, whose numbers are just
TOO HIGH. They have got to come down." One-by-one, each of the
sell-side analysts left the room, went outside, pulled out their cell
phones and called their trading desks to tell them that Microsoft was
talking down numbers. John Shirley finished his presentation to two
people, Chip Morris, a buy-side analyst from T. Rowe Price and me.
Analysts started filing back into the room, and word spread quickly
that Microsoft's stock was down 4 1/2 points...as I stepped out of the
presentation room, there were Bill Gates and Jon Shirley standing there
laughing as hard as they could. I heard Gates say, "What suckers, this
is too much fun." Microsoft was probably pricing their employee stock
options the next week, and the timing of the analyst meeting was a
fortuitous bang to the stock.
And if Kessler is accurate, this is an example of a company who sought a lower
stock price. One can imagine the sandbagging, whisper numbers, pro forma
earnings, and other games that developed in the corporate dance with Wall Street
analysts from companies who sought higher prices for their stocks in the 1990's.
With the major qualifications above, we would concede that there could be some
efficacy to an approach such as earnings surprises. Yet, it's simply not our
approach. It is important to point out however, that it is likely a costly
approach. Trading costs, short-term capital gains taxes, and the cost of
attempting to acquire superior short-term information all will likely be high.
Our own approach involves estimating the long-term value of a business based on
the present value of its expected future cash flows. Then we look to the market
price to discover whether an investment opportunity exists. If we worked
backward, we would attempt to infer the long-term consensus expectations
embedded in the current stock price, and find opportunity only when our
expectations were more favorable than consensus.
An Example of Our Approach
In an early 2001 letter to shareholders of what was then the Diamond Hill Focus
Fund, we reviewed a successful investment in Electronics For Imaging (EFII). To
summarize, we bought in October 2000 at $11.50 per share, when the company held
$8 per share of net cash and short-term marketable securities, and estimated
potential "normalized" earnings of as much as $1 per share. In January of 2001,
we sold our stake at a price of roughly $18.50. In that letter, we wrote:
So how do we know if we were "lucky" or "skilled"? Our answer is that
right now, we're not sure. But after we sell a stock, we continue to keep
tabs on the company. If in two years time, we find that EFII has burned
through all their cash and has little economic earnings power, we'd likely
agree "lucky" and that the perceived value was ephemeral. In other words,
if we find ourselves consistently selling things "at the top" only to
watch them crash after a sale, the relief we will feel as fellow
shareholders will be greatly tempered by concern that we are making
mistakes in the beginning.
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Page 6 Diamond Hill Funds Annual Report December 31, 2005
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Let's update for subsequent events in regards to both the price and value of
EFII. The first critical point is to understand the concept of a required rate
of return, which is akin to an opportunity cost. If the stock was indeed worth
$18.50 per share in early 2001, it should sell for a higher price today. Using
required rates of return between 8% and 10% would yield an "appropriate" price
for EFII of $27 - $30 per share today, which is approximately the price EFII has
been trading at the past few months. Measured by today's price alone, selling in
early 2001 was a "push," as we would have received an approximate fair return on
the stock over the subsequent holding period (EFII has not paid any dividends
over this period). In terms of subsequent fundamental value, EFII now has $5.60
per share in net cash and marketable securities after making a $280 million
acquisition in 2005 (the share count is up just slightly from five years ago,
and the company might have $10.50 per share cash without the acquisition).
Including 2005, EFII will have averaged approximately $.75 per share in earnings
over the last five years, short of our expectation of $1 in "normalized"
earnings which we would have assumed would have grown closer to $1.50 by now.
Thus, we would conclude EFII today is fairly valued today if it can achieve
"normalized" earnings of $1.50, growing at least at a high single digit rate.
From today's vantage point, the bottom line would seem that at a price of $11.50
in early 2001, EFII offered a margin of safety whereas at $18.50 it did not.
There are a couple points worth making here. When analyzing the value of EFII,
we used a long-term horizon. Earnings and dividends were estimated over an
assumed five-year holding period, with a terminal value, or target price,
assigned at the end of the fifth year. This terminal value is based in part on
assumptions concerning growth and risk in years six and beyond, so the horizon
theoretically extends forever, although the mathematics of present value render
cash flows received in the very distant future inconsequential. Note, however,
that we were short-term owners of the stock. The decision-making process was
completely driven by price-value considerations. The goal of our approach is to
achieve an attractive, risk-adjusted after tax return. Low portfolio turnover is
often a means to achieve that end, but should not be confused with the
objective. We anticipate that our portfolio turnover will be lower than many of
our peers based on our approach. However, a finding of both high returns and
portfolio turnover would not necessarily contradict a long-term investment
approach. If, however, our returns are low and portfolio turnover is high, it
would indicate either a deviation from the approach or evidence of mistakes in
our initial analysis and purchase that then caused us to reverse course.
Conclusion
Equity investing is an activity that lends itself to a long-term horizon. In the
past, we have suggested five years as the minimum amount of time over which to
analyze the value of a business, as well as to measure the progress of an equity
manager. Even five years could prove too brief if the end points reflect
extremes in market psychology. As ever, we are reminded of Benjamin Graham's
quotation that, "In the short run the stock market is a voting machine; in the
long run it is a weighing machine."
/s/ Thomas P. Schindler
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Thomas P. Schindler, CFA
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Diamond Hill Funds Annual Report December 31, 2005 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 Five Years 12/29/00
Ended 12/31/05 Ended 12/31/05 Inception
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Diamond Hill Small Cap Fund (DHSCX) 12.90% 20.34% 20.31%
- ---------------------------------------------------------------------------------------------
Russell 2000 Index 4.55% 8.22% 8.20%
- ---------------------------------------------------------------------------------------------
* 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]
R.H. Dillon, CFA
Co-Portfolio Manager
[Photo]
Thomas P. Schindler, CFA
Co-Portfolio Manager
The Diamond Hill Small Cap Fund has now been in operation for five years. We
have always considered five years to be the minimum amount of time necessary to
appropriately evaluate performance. We are pleased with the results achieved
thus far, both in an absolute and relative sense.
There are several reasons for our preference for longer-term performance
evaluation periods. First, we believe short-term stock price movements are often
most influenced by investor psychology and market emotions, an unpredictable (or
random) source of returns in our opinion. Only over longer periods of time do
stock price movements reflect investment fundamentals and market economics,
which while often still difficult to predict, more accurately describe
investment activity, rather than speculative activity.
Another reason for our preference pertains to the mathematics of compound
interest. Those in active investment management often cite the ability to have
an objective scorecard in relation to par, the investment benchmark, as an
attractive element of the business. A manager wants to know: How am I doing?
Taking into account compound interest, the answer to that question is not always
perfectly clear. Consider the returns experienced in the Diamond Hill Small Cap
Fund at the end of this year.
Russell
DHSCX (1) 2000 (2) Relative (1-2)
---------------------------------------------
As of 10/31/05
YTD 7.57% 0.24% 7.33%
Cumulative Since Inception 140.41% 42.66% 97.75%
As of 11/30/05
YTD 11.02% 5.10% 5.92%
Cumulative Since Inception 148.14% 49.59% 98.55%
As of 12/31/05
YTD 12.90% 4.55% 8.35%
Cumulative Since Inception 152.33% 48.91% 103.42%
The November return for the Diamond Hill Small Cap Fund was 3.21%, an attractive
absolute monthly return, which brought the year-to-date return to 11.02%. Yet,
the Russell 2000 Index return in November was 4.85%, and thus our relative
year-to-date lead on the index shrunk during the month. So how did we do? It
seems obvious that November was a poor month, but it actually depends upon the
time frame under consideration. Observe that based on since inception results,
the relative spread between the Fund and the index actually increased. In this
case, because the cumulative return of the Fund was quite high and the relative
spread was large, a positive absolute return was enough to overcome a negative
relative return. There is a drawback to the above example. One might ask: What
about an investor who became a shareholder on October 31? He obviously does not
benefit from the historic cumulative performance, so his personal return has
lagged the benchmark? This is true and brings us to our dual goals in managing
the Fund. Our primary objective is to outperform the Russell 2000 Index
benchmark over most five-year time frames. We also strive to provide an
attractive absolute return over most five-year market environments. Thus, for
the shareholder who has made his first Fund investment on October 31, 2005, we
hope he shares an investment horizon extending at least to October 2010.
- --------------------------------------------------------------------------------
Page 8 Diamond Hill Funds Annual Report December 31, 2005
- --------------------------------------------------------------------------------
Portfolio Commentary
The performance of the Fund in 2005, just as in 2004, was aided by holdings in
the energy sector. The following were the full-year total returns of energy
stocks that were in the portfolio at both the beginning and end of the year:
Company Primary Business 2005 Total Return
- ---------------------- ------------------------ ---------------------
Southwestern Energy Oil & Gas Production 184%
Lufkin Industries Drilling Equipment 154%
Helmerich & Payne Oil Drilling Services 83%
Encore Acquisition Oil & Gas Production 38%
Tidewater Offshore Oil Service 27%
Berry Petroleum Oil & Gas Production 21%
Cimarex Oil & Gas Production 14%
In addition, positions in Remington Oil & Gas and Whiting Petroleum were
initiated during the year. Among the exploration and production companies,
earnings per share grew at a rapid pace due to increased oil and gas prices and
increased production. These companies have also generally been increasing
capital budgets and growing proved reserves. On the service side, increased
dayrates and utilization as well as efforts to contain costs have driven
earnings higher.
Airline stocks were also positive contributors to the Fund during the year. We
initiated positions in Airtran (up 44% from our cost basis), Frontier (down 3.6%
from cost) and America West, which then merged with U.S. Airways and continues
under that corporate name (up 98% from cost). In addition, Republic Airways was
purchased and sold within the year, registering a gain of 28%. The airlines are
a somewhat unusual investment for us, but we saw opportunity in the changing
competitive landscape brought on by the bankruptcies of several of the major
airlines. Jet fuel prices have impacted both the earnings results and the
short-term fluctuations in the stock prices. The airline purchases were not
meant as a hedge of our exposure in the energy sector, but they have frequently
traded in an opposite fashion. Nevertheless, thus far, we have managed
attractive total returns in each since our original purchases.
Other significant positive contributors held at both the beginning and end of
the year include TriZetto (up 79%), Martin Marietta Materials, (up 45%), United
Auto Group (up 30%), Trinity Industries (up 30%), Washington Group (up 28%)
Moneygram (up 24%), and Brink's (up 22%). In addition, we concluded a very
successful investment in PacifiCare in December prior to the completion of its
acquisition by UnitedHealth Group.
Major negative contributions in the portfolio came from two paper companies,
Buckeye Technologies and Bowater, as higher costs such as energy prevented any
bottom line recovery as pricing improves. Belo, American Greetings, Eagle
Hospitality, and Multimedia Games declined 17%, 12%, 17%, and 41% respectively.
Maytag was sold early in the year at a loss after severely disappointing
earnings results. Finally, PXRE Group, a re-insurer we sold at a significant
loss, suffered from large claims related to Hurricanes Katrina and Rita.
Thank you again for your interest in the Diamond Hill Small Cap Fund.
/s/ R. H. Dillon /s/ Thomas P. Schindler
- --------------------- -------------------------------
R. H. Dillon, CFA Thomas P. Schindler, CFA
Portfolio Manager Portfolio Manager
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2005 Page 9
================================================================================
Growth of $10,000
- --------------------------------------------------------------------------------
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
[Line Graph]
Small Cap Russell 2000
Date Fund Class A Date Index
---- ------------ ---- -----
12/29/00 9,497 12/29/00 10,000
12/31/00 9,497 12/31/00 10,000
01/31/01 10,694 01/31/01 10,521
02/28/01 10,694 02/28/01 9,831
03/31/01 10,295 03/31/01 9,350
04/30/01 11,415 04/30/01 10,081
05/31/01 11,795 05/31/01 10,329
06/30/01 12,204 06/30/01 10,686
07/31/01 11,890 07/31/01 10,108
08/31/01 11,567 08/31/01 9,781
09/30/01 9,421 09/30/01 8,465
10/31/01 10,361 10/31/01 8,960
11/30/01 11,472 11/30/01 9,653
12/31/01 11,912 12/31/01 10,249
03/31/02 13,269 03/31/02 10,657
06/30/02 12,533 06/30/02 9,767
09/30/02 10,148 09/30/02 7,677
12/31/02 10,932 12/31/02 8,150
03/31/03 9,951 03/31/03 7,784
06/30/03 12,069 06/30/03 9,607
09/30/03 14,242 09/30/03 10,478
12/31/03 16,417 12/31/03 12,000
03/31/04 17,514 03/31/04 12,752
06/30/04 18,139 06/30/04 12,812
09/30/04 18,861 09/30/04 12,445
12/31/04 21,225 12/31/04 14,199
03/31/05 20,799 03/31/05 13,441
06/30/05 21,711 06/30/05 14,021
09/30/05 23,436 09/30/05 14,679
12/31/05 23,963 12/31/05 14,845
Diamond Hill Small Cap Fund - Class A |_|
Average Annual Total Return(B)
|_| One Year |_| Five Years |_| Since Inception(C) |_|
|_| 7.24%|_| 19.10%|_| 19.08%
(A) The chart above represents the performance of Class A shares only, which
will vary from the performance of Class C and Class I shares based on the
difference in loads and fees paid by shareholders in the different
classes.
(B) The average annual total returns shown above are adjusted for maximum
applicable salescharge of 5.00%.
(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 15%
Consumer Staples 1%
Energy 20%
Financial 6%
Health Care 4%
Industrial 14%
Information Technology 2%
Materials 6%
Utilities 1%
Cash and Cash Equivalents 31%
------
100%
======
- --------------------------------------------------------------------------------
Page 10 Diamond Hill Funds Annual Report December 31, 2005
- --------------------------------------------------------------------------------
Diamond Hill Large Cap Fund
- --------------------------------------------------------------------------------
Performance Update
- --------------------------------------------------------------------------------
Results (Class A) Since Inception*
Since
Year 6/29/01
Ended 12/31/05 Inception
- --------------------------------------------------------------------------
Diamond Hill Large Cap Fund (DHLAX) 16.19% 9.12%
- --------------------------------------------------------------------------
Russell 1000 Index 6.27% 2.83%
- --------------------------------------------------------------------------
* 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 for the Diamond Hill Large Cap Fund in 2005. The
Fund's return of 16.19% exceeded the return on the Russell 1000 index of 6.27%.
The market rally in the 4th quarter was somewhat subdued compared to last year
but it did allow for reasonable if uninspiring returns for the index.
Entering 2005 we had major investments in the energy sector which we maintained
throughout the year. It is my belief that the market has failed to properly
value these securities as the secular fundamentals have shown considerable
improvement. Demand growth continues to strain the ability of the market to
provide ever increasing quantities of oil leading to strong pricing in the
sector. Companies such as Burlington Resources and Devon Energy were very
important in providing the favorable returns in 2005.
Throughout the year the fund maintained large holdings in other commodity stocks
as well. Phelps Dodge was a large holding we added to the fund in 2004 and it
was the biggest contributor to Fund performance in 2005. This large copper
company has continued to thrive as strong copper prices have driven an earnings
recovery at the company.
A longtime holding for the portfolio was Pacificare. This was a gratifying
investment and was very helpful to performance again this year as the company
was purchased by UnitedHealth Group. United is a leading managed care company
with an outstanding record and we have maintained the holding in the portfolio.
I have continued to avoid technology holdings in the Fund. Their valuations
reflect levels of growth and profitability I believe will be difficult to
achieve. I look forward to the day when these securities appear cheap but until
then I will avoid investment in this sector.
I want to thank shareholders for their continued support. I hope to be working
with you for many years to come.
/s/ Charles S. Bath
- ----------------------------
Charles S. Bath, CFA
Managing Director - Equities
and Portfolio Manager
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2005 Page 11
- --------------------------------------------------------------------------------
================================================================================
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
[Line Graph]
Large Cap Russell 1000
Date Class A Date Index
---- ------- ---- -----
06/29/01 9,497 06/29/01 10,000
06/30/01 9,497 06/30/01 10,000
07/31/01 9,450 07/31/01 9,860
08/31/01 9,383 08/31/01 9,260
09/30/01 8,509 09/30/01 8,474
10/31/01 8,775 10/31/01 8,651
11/30/01 9,383 11/30/01 9,317
12/31/01 9,562 12/31/01 9,416
01/31/02 9,344 01/31/02 9,297
02/28/02 9,562 02/28/02 9,111
03/31/02 9,895 03/31/02 9,485
04/30/02 9,344 04/30/02 8,942
05/31/02 9,211 05/31/02 8,863
06/30/02 8,488 06/30/02 8,209
09/30/02 6,986 09/30/02 6,821
12/31/02 7,580 12/31/02 7,377
03/31/03 7,223 03/31/03 7,161
06/30/03 7,978 06/30/03 8,288
09/30/03 8,668 09/30/03 8,536
12/31/03 9,999 12/31/03 9,583
03/31/04 10,376 03/31/04 9,765
06/30/04 10,821 06/30/04 9,902
09/30/04 11,091 09/30/04 9,722
12/31/04 12,111 12/31/04 10,675
03/31/05 12,488 03/31/05 10,471
06/30/05 12,653 06/30/05 10,686
09/30/05 13,795 09/30/05 11,108
12/31/05 14,071 12/31/05 11,344
Diamond Hill Large Cap Fund - Class A |_|
Average Annual Total Return(B)
|_| One Year |_| Since Inception(C) |_|
|_| 10.37% |_| 7.87%
(A) The chart above represents the performance of Class A shares only, which
will vary from the performance of Class C and Class I shares based on the
difference in loads 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 5.00%.
(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 11%
Consumer Staples 3%
Energy 24%
Financial 12%
Health Care 10%
Industrial 12%
Materials 12%
Utilities 3%
Cash and Cash Equivalents 12%
Other Assets/Liabilities (net) 1%
------
100%
======
- --------------------------------------------------------------------------------
Page 12 Diamond Hill Funds Annual Report December 31, 2005
- --------------------------------------------------------------------------------
Diamond Hill Focus Long-Short Fund
- --------------------------------------------------------------------------------
Performance Update
- --------------------------------------------------------------------------------
Results (Class A) Since Inception*
Since
Year Five Years 6/30/00
Ended 12/31/05 Ended 12/31/05 Inception
- ----------------------------------------------------------------------------------
Diamond Hill Focus Fund (DIAMX) 21.46% 10.65% 10.07%
- ----------------------------------------------------------------------------------
Russell 3000 Index 6.12% 1.58% -0.16%
- ----------------------------------------------------------------------------------
* 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]
R.H. Dillon, CFA
Co-Portfolio Manager
[Photo]
Charles S. Bath, CFA
Co-Portfolio Manager
The Diamond Hill Focus Long-Short Fund returned 21.46% in 2005 compared to 6.12%
for the Russell 3000. We are pleased with the performance of the Fund in both
relative and absolute terms. The performance was mostly driven by the strong
performance of the long positions as the largest holdings in the portfolio
generally performed very well.
Entering 2005 we had major investments in the energy sector which we maintained
throughout the year. It is my belief that the market has failed to properly
value these securities as the secular fundamentals have shown considerable
improvement. Demand growth continues to strain the ability of the market to
provide ever increasing quantities of oil leading to strong pricing in the
sector. Companies such as Burlington Resources and Devon Energy were very
important in providing favorable returns in 2005.
Throughout the year we maintained large holdings in other commodity stocks as
well. Phelps Dodge was a large fund holding we added to the fund in 2004 and it
was the biggest contributor to Fund performance in 2005. The large copper
company has continued to thrive as strong copper prices have driven an earnings
recovery at the company.
US Airways is a new holding in the portfolio and was a significant contributor
to the performance of the Fund. This company was formed by the merger of US
Airways and America West Airlines. The company appears well positioned for
improving conditions in the airline industry and is highly leveraged to
improving revenues and earnings.
The performance of the short portfolio was driven by gains in Apollo Group and
the automobile stocks. The problems of the auto industry are well known. We are
short these shares as the problems do not yet appear to be fully reflected in
the stock prices. Apollo is an education company whose shares are highly valued
but is facing a slowdown at the company and in the industry. These short
positions are still in the portfolio as of year-end.
We want to thank shareholders for their support in 2005. We look forward to
working with you in the years ahead.
/s/ R. H. Dillon /s/ Charles S. Bath
--------------------- -------------------------
R. H. Dillon, CFA Charles S. Bath, CFA
Portfolio Manager Portfolio Manager
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2005 Page 13
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
[Line Graph]
Focus Fund Russell 3000
Date Class A Date Index
---- ------- ---- -----
06/30/00 9,497 06/30/00 10,000
07/31/00 9,260 07/31/00 9,823
08/31/00 9,649 08/31/00 10,552
09/30/00 9,848 09/30/00 10,074
10/31/00 9,488 10/31/00 9,931
11/30/00 8,994 11/30/00 9,015
12/31/00 9,709 12/31/00 9,167
01/31/01 10,734 01/31/01 9,480
02/28/01 10,867 02/28/01 8,614
03/31/01 10,373 03/31/01 8,052
04/30/01 11,295 04/30/01 8,698
05/31/01 11,485 05/31/01 8,767
06/30/01 11,618 06/30/01 8,606
09/30/01 8,588 09/30/01 7,262
12/31/01 10,302 12/31/01 8,116
03/31/02 11,364 03/31/02 8,195
06/30/02 10,418 06/30/02 7,122
09/30/02 8,564 09/30/02 5,895
12/31/02 9,230 12/31/02 6,368
03/31/03 8,545 03/31/03 6,174
06/30/03 10,206 06/30/03 7,177
09/30/03 10,273 09/30/03 7,423
12/31/03 11,345 12/31/03 8,345
03/31/04 11,760 03/31/04 8,531
06/30/04 11,992 06/30/04 8,645
09/30/04 12,726 09/30/04 8,481
12/31/04 13,258 12/31/04 9,342
03/31/05 14,150 03/31/05 9,137
06/30/05 14,228 06/30/05 9,341
09/30/05 15,595 09/30/05 9,716
12/31/05 16,102 12/31/05 9,914
Diamond Hill Focus Long -Short Fund - Class A |_|
Average Annual Total Return(B)
|_| One Year |_| Five Years |_| Since Inception(C) |_|
|_| 15.38% |_| 9.53% |_| 9.04%
(A) The chart above represents the performance of Class A shares only, which
will vary from the performance of Class C and 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 5.00%.
(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 9% 9%
Energy 24% 24%
Financials 10% 10%
Health Care 7% 7%
Industrials 13% 13%
Materials 11% 11%
Utilities 3% 3%
Cash & Cash Equivalents 17% 17%
Other Assets/Liabilities (net) 6% 6%
------
100%
======
% of Short % of Net
Sector Allocation Portfolio Assets
- ----------------- --------- ------
Short Portfolio
Consumer Discretionary 62% -20%
Consumer Staples 4% -1%
Finance 7% -2%
Health Care 3% -1%
Industrials 3% -1%
Information Technology 14% -4%
Utilities 1% -1%
Semiconductors 6% -2%
------
100%
======
Other
Segregated Cash with Brokers 32%
------
100%
======
- --------------------------------------------------------------------------------
Page 14 Diamond Hill Funds Annual Report December 31, 2005
================================================================================
Diamond Hill Bank & Financial Fund
- --------------------------------------------------------------------------------
Performance Update
- --------------------------------------------------------------------------------
Results (Class A) Since Inception*
Since
Year Five Years 8/1/97
Ended 12/31/05 Ended 12/31/05 Inception
- -----------------------------------------------------------------------------------------------
Diamond Hill Bank & Financial Fund (BANCX) 0.25% 17.99% 13.05%
- -----------------------------------------------------------------------------------------------
S&P SuperComposite 1500 Financial Index 6.62% 4.15% 4.31%
- -----------------------------------------------------------------------------------------------
NASDAQ Bank Index -1.93% 12.29% 9.58%
- -----------------------------------------------------------------------------------------------
* 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 being in negative territory for much of 2005, the Diamond Hill Bank &
Financial Fund eked out a very small gain for the year. Much like the Fund,
equity indices in the U.S. were in negative territory for most of the year
before a fourth quarter rally pushed them into positive territory. The S&P 500
index recorded a total return for the year of 4.91%, while the S&P 1500
Financials posted a total return of 6.62%. Unlike the past five years, small
banks and thrifts broke their winning streak and underperformed the larger cap
financials as well as the broader indices. The NASDAQ Bank index (which is
generally indicative of the performance of small cap banks and thrifts) recorded
a total return of -1.93%. The total return for the Diamond Hill Bank & Financial
Fund (class A shares) in 2005 was 0.25%. While I am not terribly pleased with
fund's performance in 2005, I remain generally satisfied with the longer term
performance of the Fund. I continue to expect the performance of the Diamond
Hill Bank & Financial Fund to be superior to the overall financial sector (over
sufficiently long time periods) and remain hopeful the Fund will provide
shareholders with acceptable results on an absolute basis.
Notable positive contributors to the Fund's performance in 2005 were Assurant
(AIZ) and First State Bancorp (FSNM). Assurant, a multi-line insurance carrier
that was spun out of Fortis in 2004 provided a total return of over 43% for the
year. The company was added to the portfolio shortly after the spin out and has
continued to generate strong underwriting results and growth. FSNM generated a
total return of 32% for the year and was aided by continued strong growth in its
western footprint. The weightings of both AIZ and FSNM have been reduced as the
discounts to intrinsic value have narrowed considerably. On the other side of
the coin, Commercial Capital and Fifth Third were large detractors from the
Fund's performance during 2005. Both were negatively affected by narrowing net
interest margins, slowing revenue growth and contracting valuation multiples.
Our investment in Fifth Third was reduced throughout the year as I continued to
mark down my assessment of the company's value. Near term pressures aside,
Commercial Capital remained a medium sized holding in the Fund at year end. The
Fund was also hurt by the poor performance of two smaller holdings in the
property catastrophe reinsurance industry. PXRE and Montpelier RE were both
subject to very substantial losses due to the level of hurricane activity in the
Gulf region. These holdings were divested as I became less confident in the
longer term outlook for the industry.
Another notable development during 2005 was the lack of mergers and acquisitions
after two years of increasing activity. For the first time since I began
managing the portfolio, we did not have any investments that were meaningfully
affected by a merger or acquisition during the year. I believe an important
reason for the general lack of activity within the sector is the disparity in
valuations between the larger and smaller companies. Especially within the bank
and thrift industry, small and mid cap companies enjoy healthy valuation
premiums versus their large cap peers. This of course makes it difficult for
those large companies to be buyers of smaller targets. This small cap premium
has actually been normative in the past, with the notable exception of the
1999-2000 bubble years. However, the magnitude of the difference has been quite
large since the second half of 2004. Obviously, this valuation gap does not
preclude M&A activity it just tends to make the accounting "math" difficult and
therefore the economics even more problematic. As one might guess by looking at
the performance of the NASDAQ Bank Index, small banks and thrifts did slightly
under-perform their larger
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2005 Page 15
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Portfolio Commentary (continued)
- --------------------------------------------------------------------------------
counterparts in 2005 and therefore this gap has begun to narrow. Combined with
moderating expectations on the part of potential sellers, I am hopeful we will
see a pick up in transactions in the coming year as consolidation is beneficial
for both the industry's fundamentals as well as the underlying stocks.
As in the past, we continue to believe shareholders in the Fund will benefit
from a relatively concentrated portfolio. We typically hold between 25 and 35
stocks 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 the 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 of intrinsic value. We do not intend to
do this as a `hedge' to mitigate our long exposure, but instead as a 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
- --------------------------------------------------------------------------------
Page 16 Diamond Hill Funds Annual Report December 31, 2005
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
[Line Graph]
Bank & S&P 1500
Financial Supercomposite Nasdaq
Date Fund Class A Date Financial Index Date Bank Index
---- ------------ ---- --------------- ---- ----------
08/01/97 9,497 08/01/97 10,000 08/01/97 10,000
08/31/97 9,459 08/31/97 9,318 08/31/97 9,952
09/30/97 10,333 09/30/97 10,082 09/30/97 11,014
10/31/97 10,589 10/31/97 9,869 10/31/97 11,205
11/30/97 10,836 11/30/97 10,241 11/30/97 11,342
12/31/97 11,776 12/31/97 10,831 12/31/97 12,169
01/31/98 11,634 01/31/98 10,477 01/31/98 11,721
02/28/98 12,109 02/28/98 11,427 02/28/98 12,389
03/31/98 12,802 03/31/98 12,050 03/31/98 13,002
04/30/98 13,533 04/30/98 12,241 04/30/98 13,208
05/31/98 13,571 05/31/98 11,920 05/31/98 12,902
06/30/98 13,144 06/30/98 12,357 06/30/98 12,510
07/31/98 12,963 07/31/98 12,354 07/31/98 11,956
08/31/98 10,532 08/31/98 9,512 08/31/98 9,572
09/30/98 10,532 09/30/98 9,742 09/30/98 10,238
12/31/98 10,701 12/31/98 11,828 12/31/98 10,922
03/31/99 10,570 03/31/99 12,530 03/31/99 10,452
06/30/99 11,558 06/30/99 13,138 06/30/99 11,213
09/30/99 10,953 09/30/99 11,094 09/30/99 10,161
12/31/99 10,304 12/31/99 11,940 12/31/99 10,285
03/31/00 9,320 03/31/00 12,107 03/31/00 9,373
06/30/00 8,823 06/30/00 11,684 06/30/00 9,231
09/30/00 10,192 09/30/00 14,399 09/30/00 11,040
12/31/00 11,663 12/31/00 14,785 12/31/00 12,109
03/31/01 11,926 03/31/01 13,303 03/31/01 11,827
06/30/01 13,681 06/30/01 14,339 06/30/01 13,304
09/30/01 14,157 09/30/01 12,488 09/30/01 13,070
12/31/01 14,452 12/31/01 13,385 12/31/01 13,629
03/31/02 15,973 03/31/02 13,909 03/31/02 15,013
06/30/02 16,815 06/30/02 12,941 06/30/02 15,524
09/30/02 15,121 09/30/02 10,784 09/30/02 14,273
12/31/02 16,074 12/31/02 11,548 12/31/02 14,575
03/31/03 15,685 03/31/03 13,655 03/31/03 14,318
06/30/03 18,516 06/30/03 12,966 06/30/03 16,251
09/30/03 19,636 09/30/03 13,549 09/30/03 17,236
12/31/03 22,801 12/31/03 15,183 12/31/03 19,390
03/31/04 23,668 03/31/04 15,958 03/31/04 19,839
06/30/04 24,025 06/30/04 15,579 06/30/04 19,693
09/30/04 24,801 09/30/04 15,688 09/30/04 20,251
12/31/04 26,604 12/31/04 16,993 12/31/04 22,040
03/31/05 25,309 03/31/05 15,912 03/31/05 20,445
06/30/05 25,977 06/30/05 16,647 06/30/05 21,099
09/30/05 25,532 09/30/05 16,799 09/30/05 21,103
12/31/05 26,668 12/31/05 18,115 12/31/05 21,618
Diamond Hill Bank & Financial Fund - Class A |_|
Average Annual Total Return(B)
|_| One Year |_| Five Years |_| Since Inception(C) |_|
|_| -4.78% |_| 16.78% |_| 12.36%
(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 5.00%.
(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 2%
Common Stocks:
Finance - Banks & Thrifts 58%
Financial 2%
Financial - Diversified 16%
Insurance 8%
Real Estate Investment Trust 3%
Corporate Bond 2%
Cash and Cash Equivalents 10%
Other Assets/Liabilities (net) -1%
------
100%
======
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2005 Page 17
- --------------------------------------------------------------------------------
Diamond Hill Strategic Income Fund
- --------------------------------------------------------------------------------
Performance Update
- --------------------------------------------------------------------------------
Results (Class A) Since Inception*
Since
Year 9/30/02
Ended 12/31/05 Inception
- ---------------------------------------------------------------------------
Diamond Hill Strategic Income Fund (DSIAX) 2.41% 10.62%
- ---------------------------------------------------------------------------
Merrill Lynch Domestic Master Index 2.55% 3.87%
- ---------------------------------------------------------------------------
* 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]
Kent K. Rinker
Portfolio Manager
The Diamond Hill Strategic Income Fund produced a total rate of return of 2.41%
for the year ended December 31, 2005. This was in line, but a little less than
the Merrill Lynch Domestic Master Index, which had a total return of 2.55% for
the same period. At the end of last year's portfolio commentary, we discussed
what a difficult market environment 2004 had been. Little did we know that 2005
would turn out to make 2004 seem like an easy year to manage this portfolio.
2005 marked the third anniversary for the inception of our fund, and, despite an
average year from a performance perspective, our returns over the past three
years place us at the top of the Lipper flexible income funds category for the
one and three year periods ended December 31, 2005.
There were a number of issues in 2005 that were relevant to performance. First
and foremost was the Federal Reserve's continual increasing of short term
interest rates. The fed funds rate was increased from 2.25% to 4.25%. This
caused the entire short end of the yield curve to move up in yield, which hurt
the market values of any security with a maturity of less than ten years. The
yield curve became very flat, with ten-year securities being priced throughout
the year around the 4.25%-4.40% area.
This was the first time in 40 years that rising short-term rates did not
coincide with rising long term rates.
A second area of concern for the fixed income markets was that corporate credit
spreads started to widen versus U.S. Treasury securities. Granted, the bulk of
the higher yields came from the airline and auto sector. However, even short
maturity issues, which we purchased mid-year, came under increased price
pressure.
Finally, the devastating hurricanes had an impact on the delivery of oil and gas
from the Gulf region. While only for a brief period, this caused some market
dislocation for some of the Master Limited Partnership securities that we own.
At the end of the year, our portfolio had changed somewhat, with an increased
exposure to U.S. Government/Agency securities, whose yields became competitive
with corporate yields. At the same time we increased the duration of the
portfolio from about 4.25 years to about 5.0 years. We are starting to become
more comfortable with duration risk, but a little less comfortable with credit
risk. We look forward to meeting what challenges we see this year and we thank
you for your continued support the Diamond Hill Strategic Income Fund.
/s/ Kent Rinker /s/ Rick Moore /s/ William Zox
- --------------- -------------------------- --------------------------
Kent Rinker Rick Moore, CFA William Zox, CFA, J.D., LL.M.
Portfolio Manager Investment Analyst - Fixed Income Investment Analyst - Fixed Income
- --------------------------------------------------------------------------------
Page 18 Diamond Hill Funds Annual Report December 31, 2005
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
[Line Graph]
Merill Lynch
Strategic Income Domestic
Date Fund Class A Date Master Index
---- ------------ ---- ------------
09/30/02 9,653 09/30/02 10,000
10/31/02 9,671 10/31/02 9,955
11/30/02 9,911 11/30/02 9,952
12/31/02 10,086 12/31/02 10,159
03/31/03 10,559 03/31/03 10,300
06/30/03 10,865 06/30/03 10,561
09/30/03 11,616 09/30/03 10,548
12/31/03 12,171 12/31/03 10,578
03/31/04 12,567 03/31/04 10,859
06/30/04 12,082 06/30/04 10,592
09/30/04 12,700 09/30/04 10,932
12/31/04 13,079 12/31/04 11,036
03/31/05 13,107 03/31/05 10,987
06/30/05 13,451 06/30/05 11,329
09/30/05 13,473 09/30/05 11,252
12/31/05 13,401 12/31/05 11,318
Diamond Hill Strategic Income Fund - Class A |_|
Average Annual Total Returns(B)
|_| One Year |_| Since Inception(C) |_|
|_| -1.16% |_| 9.42%
(A) The chart above represents the performance of Class A shares only, which
will vary from the performance of Class C and Class I 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 3.50%.
(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 10%
REIT Common Stock 2%
REIT Preferred Stock 22%
Trust Preferred Stock 24%
Corporate Bonds - Maturing > 2 Years 8%
Corporate Bonds - Maturing or
Likely to Be Called < 2 Years 3%
U.S. Government or Agency Securities 19%
Cash and Cash Equivalents 12%
------
100%
======
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2005 Page 19
Diamond Hill Small Cap Fund
Schedule of Investments
December 31, 2005
Market
Shares Value
- -------------------------------------------------------------------------
Common Stocks -- 68.8%
Consumer Discretionary -- 14.8%
American Greetings Corp. 500,000 $ 10,985,000
Belo Corp. 250,000 5,352,500
Callaway Golf Co. 540,000 7,473,600
Lodgenet Entertainment Corp.* 175,000 2,439,500
MoneyGram International, Inc. 245,000 6,389,600
Multimedia Games, Inc. 95,000 878,750
Polaris Industries, Inc. 71,450 3,586,790
Steiner Leisure Ltd.* 113,000 4,018,280
The Brink's Co. 138,000 6,611,580
The Finish Line, Inc. 325,000 5,661,500
United Auto Group, Inc. 100,000 3,820,000
- -------------------------------------------------------------------------
57,217,100
- -------------------------------------------------------------------------
Consumer Staples -- 1.0%
Del Monte Foods Co.* 360,000 3,754,800
- -------------------------------------------------------------------------
Energy -- 19.6%
Berry Petroleum Company 130,000 7,436,000
Cimarex Energy Co.* 400,000 17,203,999
Encore Acquisition Co.* 420,000 13,456,800
Helmerich & Payne 105,000 6,500,550
James River Coal Co.* 200,000 7,640,000
Lufkin Industries, Inc. 71,000 3,540,770
Remingtion Oil & Gas Corp.* 205,000 7,482,500
Southwestern Energy Co.* 71,600 2,573,304
Tidewater, Inc. 130,000 5,779,800
Whiting Petroleum Corp.* 100,000 4,000,000
- -------------------------------------------------------------------------
75,613,723
- -------------------------------------------------------------------------
Financial -- 6.1%
1st Source Corp. 132,805 3,340,046
Access Anytime Bancorp, Inc.* 20,000 370,200
Commercial Capital Bancorp 325,000 5,564,001
Eagle Hospitality Properties Trust, Inc. 430,000 3,280,900
First State Bancorp 77,000 1,847,230
Greene County Bancshares, Inc. 24,640 674,150
Hanmi Financial Corp. 115,000 2,053,900
ITLA Capital Corp.* 58,211 2,843,607
MAF Bancorp, Inc. 85,000 3,517,300
- -------------------------------------------------------------------------
23,491,334
- -------------------------------------------------------------------------
Health Care -- 3.9%
Analogic Corporation 115,000 5,502,750
Apria Healthcare Group, Inc.* 233,000 5,617,630
Manor Care, Inc. 95,000 3,778,150
- -------------------------------------------------------------------------
14,898,530
- -------------------------------------------------------------------------
Industrial -- 13.5%
Acco Brands Corp.* 350,000 8,575,000
AirTran Holdings, Inc.* 235,000 3,767,050
Frontier Airlines, Inc.* 620,000 5,728,800
Kaydon Corp. 87,000 2,796,180
Lincoln Electric Holdings, Inc. 100,000 3,966,000
The Greenbrier Companies, Inc. 195,000 5,538,000
Trinity Industries, Inc. 163,500 7,205,445
U.S. Airways Group, Inc.* 355,050 13,186,557
Washington Group International, Inc.* 26,572 1,407,519
- -------------------------------------------------------------------------
52,170,551
- -------------------------------------------------------------------------
Information Technology -- 2.2%
Gevity HR, Inc. 150,000 3,858,000
QAD, Inc. 354,380 2,707,463
The TriZetto Group, Inc.* 123,647 2,100,763
- -------------------------------------------------------------------------
8,666,226
- -------------------------------------------------------------------------
Materials -- 6.2%
Bowater, Inc. 185,000 5,683,200
Buckeye Technologies, Inc.* 800,000 6,440,000
Century Aluminum Co.* 300,000 7,863,000
Martin Marietta Materials, Inc. 50,000 3,836,000
- -------------------------------------------------------------------------
23,822,200
- -------------------------------------------------------------------------
Utilities -- 1.5%
WPS Resources Corp. 100,000 5,531,000
- -------------------------------------------------------------------------
Total Common Stocks $265,165,464
- -------------------------------------------------------------------------
Registered Investment Companies -- 9.9%
First American Government
Obligations Fund - Class Z 19,092,071 $ 19,092,071
First American Prime
Obligations Fund - Class Z 19,092,071 19,092,071
- -------------------------------------------------------------------------
Total Registered
Investment Companies $ 38,184,142
- -------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Page 20 Diamond Hill Funds Annual Report December 31, 2005
Diamond Hill Small Cap Fund
Schedule of Investments (Continued)
December 31, 2005
Market
Par Value Value
- ------------------------------------------------------------------------------
U.S. Treasury Obligations -- 21.3%
U.S. Treasury Bill, 3.599%, 01/05/06 $16,500,000 $ 16,497,063
U.S. Treasury Bill, 3.85%, 01/26/06 15,000,000 14,962,725
U.S. Treasury Bill, 3.860%, 01/19/06 17,000,000 16,970,301
U.S. Treasury Bill, 3.88%, 02/09/06 17,000,000 16,933,190
U.S. Treasury Bill, 3.91%, 02/16/06 17,000,000 16,920,695
- ------------------------------------------------------------------------------
Total U.S. Treasury Obligations $ 82,283,974
- ------------------------------------------------------------------------------
Total Investment Securities -- 100.0%
(Amortized Cost $356,369,231) $ 385,633,580
Liabilities In Excess
Of Other Assets -- (0.0%) (159,300)
- ------------------------------------------------------------------------------
Net Assets -- 100.0% $ 385,474,280
==============================================================================
* Non-income producing security.
See accompanying Notes to Financial Statements.
Diamond Hill Large Cap Fund
Schedule of Investments
December 31, 2005
Market
Shares Value
- -------------------------------------------------------------------------
Common Stocks -- 87.1%
Consumer Discretionary -- 10.7%
Acco Brands Corp.* 1,645 $ 40,303
American Greetings Corp. 88,600 1,946,542
Belo Corp. 69,700 1,492,277
Fortune Brands, Inc. 30,000 2,340,600
MoneyGram International, Inc. 44,300 1,155,344
Southwest Airlines Co. 122,200 2,007,746
The Black & Decker Corp. 21,800 1,895,728
The Brink's Co. 34,300 1,643,313
- -------------------------------------------------------------------------
12,521,853
- -------------------------------------------------------------------------
Consumer Staples -- 3.3%
Archer-Daniels-Midland Co. 45,200 1,114,632
Kimberly-Clark Corp. 46,400 2,767,760
- -------------------------------------------------------------------------
3,882,392
- -------------------------------------------------------------------------
Energy -- 24.4%
Anadarko Petroleum Corp. 57,300 5,429,175
Apache Corp. 75,000 5,139,000
Burlington Resources, Inc. 63,500 5,473,699
ConocoPhillips 81,200 4,724,216
Devon Energy Corp. 86,200 5,390,948
XTO Energy, Inc. 51,800 2,276,092
- -------------------------------------------------------------------------
28,433,130
- -------------------------------------------------------------------------
Financial -- 12.2%
Allstate Corp. 43,600 2,357,452
Comerica, Inc. 32,400 1,839,024
MBNA Corp. 104,800 2,846,368
U.S. Bancorp 116,300 3,476,207
Wells Fargo & Co. 59,900 3,763,517
- -------------------------------------------------------------------------
14,282,568
- -------------------------------------------------------------------------
Health Care -- 9.6%
Boston Scientific Corp.* 101,900 2,495,531
Johnson & Johnson 44,800 2,692,480
Manor Care, Inc. 42,500 1,690,225
Pfizer, Inc. 51,700 1,205,644
UnitedHealth Group, Inc. 33,000 2,050,620
Wellpoint, Inc.* 13,600 1,085,144
- -------------------------------------------------------------------------
11,219,644
- -------------------------------------------------------------------------
Industrial -- 11.9%
AMR Corp.* 123,500 2,745,405
Fluor Corp. 41,400 3,198,564
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2005 Page 21
Diamond Hill Large Cap Fund
Schedule of Investments (Continued)
December 31, 2005
Market
Shares Value
- ------------------------------------------------------------------------------
Common Stocks -- 87.1% continued
Industrial -- 11.9% continued
Norfolk Southern Corp. 56,300 $ 2,523,929
Parker Hannifin Corp. 17,300 1,141,108
Trinity Industries, Inc. 43,400 1,912,638
Union Pacific Corporation 29,300 2,358,943
- ------------------------------------------------------------------------------
13,880,587
- ------------------------------------------------------------------------------
Materials -- 12.1%
Bowater, Inc. 18,900 580,608
Dow Chemical Co. 60,200 2,637,964
MeadWestvaco Corp. 88,200 2,472,246
Phelps Dodge Corp. 36,900 5,308,803
Vulcan Materials Co. 950 64,363
Weyerhaeuser Co. 45,400 3,011,836
- ------------------------------------------------------------------------------
14,075,820
- ------------------------------------------------------------------------------
Utilities -- 2.9%
Dominion Resources, Inc. 42,900 3,311,880
- ------------------------------------------------------------------------------
Total Common Stocks $101,607,874
- ------------------------------------------------------------------------------
Registered Investment Companies -- 7.0%
First American Government
Obligations Fund - Class Z 2,058,640 $ 2,058,640
First American Prime
Obligations Fund - Class Z 6,061,674 6,061,675
- ------------------------------------------------------------------------------
Total Registered
Investment Companies $ 8,120,315
- ------------------------------------------------------------------------------
Market
Par Value Value
- ------------------------------------------------------------------------------
U.S. Treasury Obligations -- 4.7%
U.S. Treasury Bill, 3.599%, 01/05/06 $2,500,000 $ 2,499,555
U.S. Treasury Bill, 3.85%, 01/26/06 3,000,000 2,992,545
- ------------------------------------------------------------------------------
Total U.S. Treasury Obligations $ 5,492,100
- ------------------------------------------------------------------------------
Total Investment Securities -- 98.8%
(Amortized Cost $105,400,582) $115,220,289
Other Assets In Excess
Of Liabilities -- 1.2% 1,376,523
- ------------------------------------------------------------------------------
Net Assets -- 100.0% $116,596,812
==============================================================================
* Non-income producing security.
See accompanying Notes to Financial Statements.
Diamond Hill Focus Long-Short Fund
Schedule of Investments
December 31, 2005
Market
Shares Value
- ---------------------------------------------------------------------
Common Stocks -- 77.5%
Consumer Discretionary -- 8.6%
American Greetings Corp. + 153,600 $ 3,374,592
Belo Corp. + 199,800 4,277,718
Fortune Brands, Inc. + 79,400 6,194,788
MoneyGram International, Inc. + 107,500 2,803,600
The Black & Decker Corp. + 57,000 4,956,720
The Brink's Co. + 99,200 4,752,672
- ---------------------------------------------------------------------
26,360,090
- ---------------------------------------------------------------------
Energy -- 24.0%
Anadarko Petroleum Corp. + 135,700 12,857,575
Apache Corp. + 174,400 11,949,888
Burlington Resources, Inc. + 167,300 14,421,260
Cimarex Energy Co.* + 245,200 10,546,052
ConocoPhillips + 188,400 10,961,112
Devon Energy Corp. + 208,200 13,020,828
- ---------------------------------------------------------------------
73,756,715
- ---------------------------------------------------------------------
Financial -- 10.3%
Allstate Corp. + 108,000 5,839,560
MBNA Corp. 301,700 8,194,172
U.S. Bancorp + 298,900 8,934,121
Wells Fargo & Co. + 140,700 8,840,181
- ---------------------------------------------------------------------
31,808,034
- ---------------------------------------------------------------------
Health Care -- 7.4%
Boston Scientific Corp.* + 238,900 5,850,661
Johnson & Johnson + 109,200 6,562,919
Manor Care, Inc. + 111,850 4,448,275
UnitedHealth Group, Inc. + 95,040 5,905,786
- ---------------------------------------------------------------------
22,767,641
- ---------------------------------------------------------------------
Industrial -- 13.4%
Acco Brands Corp.* + 9,211 225,670
Fluor Corp. + 117,600 9,085,776
Norfolk Southern Corp. + 183,300 8,217,339
Trinity Industries, Inc. + 165,100 7,275,957
U.S. Airways Group, Inc.* 254,400 9,448,416
Union Pacific Corporation + 88,300 7,109,033
- ---------------------------------------------------------------------
41,362,191
- ---------------------------------------------------------------------
- --------------------------------------------------------------------------------
Page 22 Diamond Hill Funds Annual Report December 31, 2005
Diamond Hill Focus Long-Short Fund
Schedule of Investments (Continued)
December 31, 2005
Market
Shares Value
- ------------------------------------------------------------------------------
Common Stocks -- 77.5%
Materials -- 10.9%
Dow Chemical Co. + 140,600 $ 6,161,092
MeadWestvaco Corp. + 213,700 5,990,011
Phelps Dodge Corp. + 98,100 14,113,647
Weyerhaeuser Co. + 108,350 7,187,939
- ------------------------------------------------------------------------------
33,452,689
- ------------------------------------------------------------------------------
Utilities -- 2.9%
Dominion Resources, Inc. + 115,900 8,947,481
- ------------------------------------------------------------------------------
Total Common Stocks $238,454,841
- ------------------------------------------------------------------------------
Registered Investment Companies -- 13.2%
First American Government
Obligations Fund - Class Z 20,270,392 $ 20,270,392
First American Prime
Obligations Fund - Class Z 20,270,392 20,270,392
- ------------------------------------------------------------------------------
Total Registered
Investment Companies $ 40,540,784
- ------------------------------------------------------------------------------
Market
Par Value Value
- ------------------------------------------------------------------------------
U.S. Treasury Obligations -- 3.2%
U.S. Treasury Bill, 3.599%, 01/05/06 $10,000,000 $ 9,998,220
- ------------------------------------------------------------------------------
Total Investment Securities -- 93.9%
(Amortized Cost $251,119,254) $288,993,845
Segregated Cash With Brokers -- 31.9% 98,068,859
Securities Sold Short -- (31.8)%
(Proceeds $96,212,172) (97,746,810)
Other Assets In Excess
Of Liabilities -- 6.0% 18,483,266
- ------------------------------------------------------------------------------
Net Assets -- 100.0% $307,799,160
- ------------------------------------------------------------------------------
* 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 $127,721,020.
See accompanying Notes to Financial Statements.
Diamond Hill Focus Long-Short Fund
Schedule of Securities Sold Short
December 31, 2005
Market
Shares Value
- ----------------------------------------------------------------------------
Common Stocks -- 79.7%
Consumer Discretionary -- 47.0%
Amazon.com, Inc.* 180,200 $ 8,496,430
Apollo Group, Inc.* 119,900 7,249,154
Brunswick Corp. 38,500 1,565,410
Ford Motor Co. 213,550 1,648,606
General Motors Corp. 99,400 1,930,348
Harley-Davidson, Inc. 47,900 2,466,371
Kohl's Corp.* 99,100 4,816,260
Panera Bread Co.* 19,400 1,274,192
Red Robin Gourmet Burgers, Inc.* 51,500 2,624,440
Sirius Satellite Radio, Inc. 970,200 6,500,340
Winnbago Industries, Inc. 14,900 495,872
Yahoo!, Inc.* 175,500 6,876,090
- ----------------------------------------------------------------------------
45,943,513
- ----------------------------------------------------------------------------
Consumer Staples -- 4.3%
Colgate-Palmolive Co. 34,500 1,892,325
Kraft Foods, Inc. 37,600 1,058,064
Wal-Mart Stores, Inc. 26,100 1,221,480
- ----------------------------------------------------------------------------
4,171,869
- ----------------------------------------------------------------------------
Finance -- 6.9%
Corus Bankshares, Inc. 36,900 2,076,363
Midwest Banc Holdings, Inc. 13,420 298,595
PrivateBancorp, Inc. 49,700 1,767,829
Wintrust Financial Corp. 47,600 2,613,240
- ----------------------------------------------------------------------------
6,756,027
- ----------------------------------------------------------------------------
Health Care -- 3.1%
Tenet Healthcare* 401,000 3,071,660
- ----------------------------------------------------------------------------
Industrial -- 3.2%
United Parcel Service, Inc. 41,700 3,133,755
- ----------------------------------------------------------------------------
Information Technology -- 14.0%
Applied Materials, Inc. 166,400 2,985,216
Cisco Systems, Inc.* 186,800 3,198,016
EMC Corp.* 146,300 1,992,606
Juniper Networks, Inc.* 174,400 3,889,120
National Semiconductor Corp. 60,700 1,576,986
- ----------------------------------------------------------------------------
13,641,944
- ----------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2005 Page 23
Diamond Hill Focus Long-Short Fund
Schedule of Securities Sold Short (Continued)
December 31, 2005
Market
Shares Value
- --------------------------------------------------------------------------
Common Stocks -- 79.7% continued
Utilities -- 1.2%
Aqua America, Inc. 41,733 $ 1,139,311
- --------------------------------------------------------------------------
Total Common Stocks Sold Short $77,858,079
- --------------------------------------------------------------------------
Exchange Traded Funds -- 20.3%
Consumer Discretionary -- 14.8%
Internet HOLDRs Trust 139,300 $ 9,170,119
Nasdaq 100 Trust, Series I 132,200 5,343,524
- --------------------------------------------------------------------------
14,513,643
- --------------------------------------------------------------------------
Semiconductors -- 5.5%
Semiconductor HOLDRs Trust 146,700 5,375,088
- --------------------------------------------------------------------------
Total Exchange Traded
Funds Sold Short $19,888,731
- --------------------------------------------------------------------------
Total Securities Sold Short -- 100.0%
(Proceeds $96,212,172) $97,746,810
==========================================================================
* Non-income producing security.
See accompanying Notes to Financial Statements.
Diamond Hill Bank & Financial Fund
Schedule of Investments
December 31, 2005
Market
Shares Value
- -----------------------------------------------------------------------
Preferred Stocks -- 1.7%
Finance -- 0.4%
1st Source Capital Trust 3,560 $ 86,508
- -----------------------------------------------------------------------
Real Estate Investment Trust -- 1.3%
The Mills Corp. 10,000 250,000
- -----------------------------------------------------------------------
Total Preferred Stocks $ 336,508
- -----------------------------------------------------------------------
Common Stocks -- 87.0%
Finance - Banks & Thrifts -- 58.4%
1st Source Corp. 27,000 679,050
Bank of America Corp. 9,952 459,285
Bank of New York Co., Inc. 19,000 605,150
Capital Corp. of the West 6,240 202,488
Comerica, Inc. 18,000 1,021,680
Commercial Capital Bancorp, Inc. 35,264 603,720
Fifth Third Bancorp 14,029 529,174
First Horizon National Corp. 13,000 499,720
Greene County Bancshares, Inc. 6,865 187,826
Hanmi Financial Corp. 23,000 410,780
ITLA Capital Corp.* 11,302 552,103
MAF Bancorp, Inc. 12,589 520,933
MBNA Corp. 25,000 679,000
National City Corp. 9,000 302,130
PNC Financial Services Group 10,000 618,300
Sovereign Bancorp, Inc. 20,000 432,400
U.S. Bancorp 37,000 1,105,929
Wachovia Corp. 11,180 590,975
Washington Mutual, Inc. 11,500 500,250
Wells Fargo & Co. 18,000 1,130,939
- -----------------------------------------------------------------------
11,631,832
- -----------------------------------------------------------------------
Financial -- 1.9%
First State Bancorp 16,000 383,840
- -----------------------------------------------------------------------
Financial - Diversified -- 15.8%
Citigroup, Inc. 20,600 999,718
Freddie Mac 12,000 784,200
Mellon Financial Corp. 10,000 342,500
Merrill Lynch & Co., Inc. 15,000 1,015,950
- -----------------------------------------------------------------------
3,142,368
- -----------------------------------------------------------------------
- --------------------------------------------------------------------------------
Page 24 Diamond Hill Funds Annual Report December 31, 2005
Diamond Hill Bank & Financial Fund
Schedule of Investments (Continued)
December 31, 2005
Market
Shares Value
- ------------------------------------------------------------------------------
Common Stocks -- 87.0% continued
Insurance -- 7.8%
Allstate Corp. 19,000 $ 1,027,330
Assurant, Inc. 11,950 519,706
- ------------------------------------------------------------------------------
1,547,036
- ------------------------------------------------------------------------------
Real Estate Investment Trust -- 3.1%
Eagle Hospitality Properties Trust, Inc. 82,000 625,660
- ------------------------------------------------------------------------------
Total Common Stocks $17,330,736
- ------------------------------------------------------------------------------
Registered Investment Companies -- 10.1%
First American Government
Obligations Fund - Class Z 1,001,474 $ 1,001,474
First American Prime
Obligations Fund - Class Z 1,001,474 1,001,474
- ------------------------------------------------------------------------------
Total Registered
Investment Companies $ 2,002,948
- ------------------------------------------------------------------------------
Market
Par Value Value
- ------------------------------------------------------------------------------
Convertible Bond -- 1.8%
Insurance -- 1.8%
Fortis Insurance, 7.75%,
1/26/08, 144A $ 300,000 $ 361,875
- ------------------------------------------------------------------------------
Total Investment Securities -- 100.6%
(Amortized Cost $16,743,482) $20,032,067
Liabilities In Excess
Of Other Assets -- (0.6%) (121,532)
- ------------------------------------------------------------------------------
Net Assets -- 100.0% $19,910,535
==============================================================================
* Non-income producing security.
144A - This is a restricted security that was sold in a transaction exempt from
Rule 144A of the Securities Act of 1933. This security may be sold in a
transaction exempt from registration, normally to qualified institutional
buyers. At December 31, 2005, this security was valued at $361,875 or 1.8% of
net assets.
See accompanying Notes to Financial Statements.
Diamond Hill Strategic Income Fund
Schedule of Investments
December 31, 2005
Market
Shares Value
- ------------------------------------------------------------------------------
Common Stocks -- 12.4%
Energy -- 10.0%
Atlas Pipeline Partners, L.P. 28,380 $1,152,228
Energy Transfer Partners, L.P. 40,020 1,370,285
Enterprise Products Partners, L.P. 37,195 893,052
Markwest Energy Partners, L.P. 13,000 603,720
Pacific Energy Partners, L.P. 20,540 603,260
Plains All American Pipeline, L.P. 17,965 710,875
Teekay LNG Partners, L.P. 40,500 1,199,610
TEPPCO Partners, L.P. 16,060 559,530
Valero, L.P. 11,518 596,172
- ------------------------------------------------------------------------------
7,688,732
- ------------------------------------------------------------------------------
Real Estate Investment Trust -- 2.4%
Ashford Hospitality Trust 54,300 569,607
Crystal River Capital, + 8,000 196,000
Eagle Hospitality Properties Trust, Inc. 81,400 621,082
Education Realty Trust, Inc. 35,300 455,017
- ------------------------------------------------------------------------------
1,841,706
- ------------------------------------------------------------------------------
Total Common Stocks $9,530,438
- ------------------------------------------------------------------------------
Preferred Stocks -- 46.0%
AGL Capital Trust 41,500 $1,056,175
Alesco Preferred Funding III + 1,147,214 1,223,160
Alesco Preferred Funding IV + 400 414,930
Alesco Preferred Funding V + 97 96,938
Alesco Preferred Funding VI + 746,186 746,658
Alesco Preferred Funding VI Series E + 402,690 402,945
Alexandria Real Estate
Series C - REIT 38,900 1,001,675
Allegiant Capital Trust 10,923 279,083
AmerUs Group Co., 7.25% 37,500 975,000
Apartment Invt. & Mgmt. Co.,
7.75% - REIT 8,000 198,720
Apartment Invt. & Mgmt. Co.,
8.00% - REIT 13,000 325,000
Bancorpsouth Capital Trust I, 8.15% 15,000 381,600
Capital Automotive Series A - REIT 14,200 354,290
Capital Automotive Series B - REIT 20,000 500,000
CBL & Associates Series B - REIT 20,400 1,042,440
CBL & Associates Series C - REIT 19,000 480,700
CBL & Associates Series D - REIT 41,500 1,038,330
Citigroup Capital VII 10,000 253,700
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2005 Page 25
Diamond Hill Strategic Income Fund
Schedule of Investments
December 31, 2005
Market
Shares Value
- -------------------------------------------------------------------
Preferred Stocks -- 46.0% continued
Corporate Backed Trust
Certificates, 7.75% 5,000 $ 134,350
Corporate Backed Trust
Certificates, 8.20% 5,000 130,750
Corporate Backed Trust
Certificates, 8.25% 20,000 502,200
Corporate Office Trust - REIT 4,000 100,560
Corts-TR IV Safeco Capital I 4,000 106,960
Cousins Properties, Inc.
Series B - REIT 41,500 1,054,100
Dominion Resource Capital Trust II 13,000 330,590
Fleet Capital Trust VII 40,000 1,008,800
Fort Sheridan, Ltd., + 327,068 332,566
Health Care REIT, Inc., 7.625% 42,200 1,048,670
Health Care REIT, Inc., 7.875% 10,000 252,300
Huntington Preferred
Capital, Inc. - REIT 11,400 314,070
Innkeepers USA Trust 16,000 390,880
Kilroy Realty Corp., 7.50% - REIT 46,000 1,131,315
LaSalle Hotel Properties - REIT 24,000 553,200
LaSalle Hotel Properties,
Series A, 10.25% 20,500 533,000
Lexington Corporate Property
Trust - REIT 15,500 393,235
MBNA Capital 28,200 751,530
Merrill Lynch Capital Trust, 7.28% 27,000 705,240
Mills Corp. 13,500 348,705
Morgan Stanley Capital Trust II 42,000 1,069,740
Parkway Properties, Inc. - REIT 21,900 565,020
Preferredplus Trust 19,600 499,996
Provident Capital Trust III 1,000 25,000
Provident Capital Trust IV 21,250 536,350
PS Business Parks, Inc., 7.00% - REIT 39,400 953,480
PS Business Parks, Inc., 7.60% - REIT 19,300 489,255
Public Storage, Inc., 8.60% - REIT 15,000 375,300
Renaissance Holdings Ltd., 8.10%
Series A 23,000 581,440
Saturns - FON 19,500 525,525
Saturns AT&T Corp. Trust, 6.875% 17,500 422,625
SL Green Realty, Series D, 7.875% 43,800 1,099,380
Suntrust Capital IV, 7.125% 17,000 429,590
Suntrust Capital V 15,000 379,650
Taberna Preferred Funding, Ltd. + 773,773 $ 799,652
Tanger Outlet Stores, Series C, 7.50% 37,500 937,500
Taubman Centers, Inc., 8.00% - REIT 64,060 1,607,508
The Mills Corp., 7.875% - REIT 12,000 300,000
The Mills Corp., 8.75% - REIT 31,100 796,160
The Mills Corp., 9.00% - REIT 40,500 1,033,965
Wachovia Preferred Funding - REIT 25,500 712,470
Zions Capital Trust Series B 16,000 416,960
- -------------------------------------------------------------------
Total Preferred Stocks $35,450,931
- -------------------------------------------------------------------
Registered Investment Companies -- 5.6%
First American Prime
Obligations Fund - Class Z 3,675,270 $ 3,675,270
Nuveen Preferred and
Convertible Income Fund II 27,550 333,631
Nuveen Quality Preferred
Income Fund II 25,100 321,280
- -------------------------------------------------------------------
Total Registered Investment Companies $ 4,330,181
- -------------------------------------------------------------------
Market
Par Value Value
- -------------------------------------------------------------------
Corporate Bonds -- 11.3%
Consumer, Cyclical -- 0.8%
Dana Corp., 10.13%, 3/15/10 $ 75,000 $ 64,125
Echostar DBS Corp., 9.13%, 1/15/09 168,000 175,770
Ford Motor Co., 8.88%, 4/1/06 412,000 409,940
- -------------------------------------------------------------------
649,835
- -------------------------------------------------------------------
Consumer, Non-Cyclical -- 1.4%
RJ Reynolds Tobacco
Holdings, 7.25%, 6/1/12 1,075,000 1,096,500
- -------------------------------------------------------------------
Finance -- 5.2%
Ford Motor Credit Co.,
9.50%, 6/1/10 250,000 209,375
General Motors Acceptance
Corp., 6.13%, 2/1/07 900,000 859,182
General Motors Acceptance
Corp., 6.13%, 1/22/08 800,000 732,583
General Motors Corp.,
6.75%, 1/15/06 250,000 249,835
- --------------------------------------------------------------------------------
Page 26 Diamond Hill Funds Annual Report December 31, 2005
Diamond Hill Strategic Income Fund
Schedule of Investments
December 31, 2005
Market
Par Value Value
- -----------------------------------------------------------------------
Corporate Bonds -- 11.3% continued
Finance -- 5.2% continued
Tobacco Settlement Financing
Corp., 5.92%, 6/1/12 $ 210,000 $ 208,702
UBS Ag Structured, 5.07%, 6/20/08 ^ 750,000 742,500
UBS Ag Structured, 6.60%, 3/20/09 ^ 1,000,000 980,001
- -----------------------------------------------------------------------
3,982,178
- -----------------------------------------------------------------------
Industrial -- 2.1%
Beazer Homes, 8.63%, 5/15/11 305,000 318,725
D.R. Horton, Inc., 9.75%, 9/15/10 100,000 113,050
K.B. Home, 8.63%, 12/15/08 90,000 95,596
K.B. Home, 7.75%, 2/1/10 950,000 992,493
Standard Pacific Corp.,
9.25%, 4/15/12 50,000 51,438
- -----------------------------------------------------------------------
1,571,302
- -----------------------------------------------------------------------
Retail -- 1.3%
American Greetings, 6.10%, 8/1/28 980,000 994,700
- -----------------------------------------------------------------------
Utilities -- 0.5%
GTE Hawaiian Telephone,
7.00%, 2/1/06 350,000 349,562
International Telephone,
7.50%, 7/1/11 40,000 40,012
- -----------------------------------------------------------------------
389,574
- -----------------------------------------------------------------------
Total Corporate Bonds $ 8,684,089
- -----------------------------------------------------------------------
U.S. Government Agency Obligations -- 18.8%
FFCB, 4.88%, 9/24/12 1,050,000 $ 1,025,279
FHLB, 3.00%, 11/26/07 500,000 495,969
FHLB, 5.05%, 11/21/08 2,080,000 2,074,575
FHLB, 4.85%, 8/10/10 1,000,000 988,974
FHLB, 4.63%, 4/28/11 650,000 636,300
FHLB, 5.20%, 5/11/12 1,000,000 989,988
FHLB, 5.13%, 8/22/12 1,000,000 993,570
FHLB, 5.25%, 8/22/12 500,000 495,229
FHLMC, 5.05%, 4/27/12 1,030,000 1,017,086
FHLMC, 5.00%, 5/23/12 3,525,000 3,459,328
FNMA, 5.00%, 1/27/12 650,000 640,982
FNMA, 5.00%, 3/2/15 400,000 393,204
FNMA, 5.25%, 7/14/15 1,325,000 1,303,254
- -----------------------------------------------------------------------
Total U.S. Government
Agency Obligations $14,513,738
- -----------------------------------------------------------------------
Market
Par Value Value
- -----------------------------------------------------------------------
Municipal Bonds -- 0.1%
Crossett, AK Pollution Control
(Georgia-Pacific Corp. Proj.)
4.88%, 10/1/07 $ 100,000 $ 100,697
- -----------------------------------------------------------------------
U.S. Treasury Obligations -- 5.5%
U.S. Treasury Bond, 7.25%, 5/15/16 $ 3,420,000 $ 4,199,389
- -----------------------------------------------------------------------
Total Investment Securities -- 99.7%
(Amortized Cost $77,598,428) $76,809,463
Other Assets In Excess
Of Liabilities -- 0.3% 202,539
- -----------------------------------------------------------------------
Net Assets -- 100.0% $77,012,002
=======================================================================
+ Restricted and illiquid securities valued at fair value and not registered
under the Securities Act of 1933. Acquisition date and current cost:
Crystal River Capital - 3/05, $200,000; Alesco III - 3/04, $1,147,214;
Alesco IV - 5/04, $400,000; Alesco V - 10/04, $96,703; Alesco VI - 12/04,
$746,186; Alesco VI Series E - 03/05, $402,690; Fort Sheridan, Ltd. -
3/05, $327,068; Taberna Preferred Funding, Ltd. - 3/05, $773,773. At
December 31, 2005, these securities had an aggregate market value of
$4,212,849, representing 5.5% of net assets.
^ Securities totalling $1,722,501 and representing 2.2% of net assets have
been fair valued but are not considered illiquid or restricted.
FFCB - Federal Farm Credit Bank
FHLB - Federal Home Loan Bank
FHLMC - Federal Home Loan Mortgage Corporation
FNMA - Federal National Mortgage Association
REIT - Real Estate Investment Trust
See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2005 Page 27
Diamond Hill Funds
Statements of Assets & Liabilities
December 31, 2005
Focus Bank & Strategic
Small Cap Large Cap Long-Short Financial Income
Fund Fund Fund Fund Fund
---------------------------------------------------------------------
Assets
Investment securities, at cost $356,369,231 $105,400,582 $251,119,254 $ 16,743,482 $ 77,598,428
---------------------------------------------------------------------
Investment securities, at market value $385,633,580 $115,220,289 $288,993,845 $ 20,032,067 $ 76,809,463
Deposits with brokers for securities sold short -- -- 98,068,859 -- --
Cash 16,237,167 -- 13,682,921 104,380 62,593
Receivable for securities sold 1,741,424 -- 1,744,824 135,154 --
Receivable for fund shares issued 15,076,796 2,195,237 8,622,023 347,460 480,375
Receivable for dividends and interest 299,907 156,401 580,919 70,155 540,804
---------------------------------------------------------------------
Total Assets 418,988,874 117,571,927 411,693,391 20,689,216 77,893,235
---------------------------------------------------------------------
Liabilities
Securities sold short, at value (proceeds $96,212,172) -- -- 97,746,810 -- --
Dividends payable 11,404 15,627 225,473 28,620 70,495
Payable for securities purchased 32,504,879 679,764 5,113,389 498,295 524,800
Payable for dividends on securities sold short -- -- 56,261 -- --
Payable for fund shares redeemed 425,681 131,238 212,112 210,404 160,461
Payable to Investment Adviser 231,909 53,545 215,682 17,068 32,030
Payable to Administrator 111,273 34,269 86,744 6,827 21,605
Accrued distribution and service fees 229,448 60,672 237,760 17,467 71,842
---------------------------------------------------------------------
Total Liabilities 33,514,594 975,115 103,894,231 778,681 881,233
---------------------------------------------------------------------
Net Assets $385,474,280 $116,596,812 $307,799,160 $ 19,910,535 $ 77,012,002
=====================================================================
Components of Net Assets
Paid-in capital $353,064,575 $106,509,112 $269,721,722 $ 16,585,513 $ 77,988,740
Accumulated net investment income 138,005 3,063 241 36,750 142,058
Accumulated net realized gains (losses)
from investment transactions 3,007,351 264,930 1,737,246 (313) (329,831)
Net unrealized appreciation (depreciation)
on investments 29,264,349 9,819,707 36,339,951 3,288,585 (788,965)
---------------------------------------------------------------------
Net Assets $385,474,280 $116,596,812 $307,799,160 $ 19,910,535 $ 77,012,002
=====================================================================
Pricing of Class A Shares
Net assets attributable to Class A shares $308,925,397 $ 96,636,967 $180,035,183 $ 17,366,121 $ 31,456,246
=====================================================================
Shares of beneficial interest outstanding
(unlimited number of shares authorized, no par value) 12,896,784 6,692,721 10,936,275 939,515 2,796,856
=====================================================================
Net asset value and redemption price per share $ 23.95 $ 14.44 $ 16.46 $ 18.48 $ 11.25
=====================================================================
Maximum offering price per share $ 25.21 $ 15.20 $ 17.33 $ 19.45 $ 11.66
=====================================================================
Pricing of Class C Shares
Net assets attributable to Class C shares $ 41,114,659 $ 9,517,727 $ 70,891,207 $ 2,544,414 $ 20,257,190
=====================================================================
Shares of beneficial interest outstanding
(unlimited number of shares authorized, no par value) 1,781,448 672,594 4,453,379 142,647 1,802,696
=====================================================================
Net asset value, offering price and
redemption price per share (A) $ 23.08 $ 14.15 $ 15.92 $ 17.84 $ 11.24
=====================================================================
Pricing of Class I Shares
Net assets attributable to Class I shares $ 35,434,224 $ 10,442,118 $ 56,872,770 $ -- $ 25,298,566
=====================================================================
Shares of beneficial interest outstanding
(unlimited number of shares authorized, no par value) 1,477,073 721,860 3,447,911 -- 2,252,888
=====================================================================
Net asset value, offering price and
redemption price per share $ 23.99 $ 14.47 $ 16.49 $ -- $ 11.23
=====================================================================
(A) Redemption price per share varies based upon holding period.
See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
Page 28 Diamond Hill Funds Annual Report December 31, 2005
Diamond Hill Funds
Statements of Operations
For the year ended December 31, 2005
Focus Bank & Strategic
Small Cap Large Cap Long-Short Financial Income
Fund Fund Fund Fund Fund
-----------------------------------------------------------------------
Investment Income
Dividends from non-affiliated securities $ 1,628,523 $ 934,426 $ 4,509,974 $ 656,015 $ 3,274,070
Dividends from affiliated securities 48,206 -- 77,899 8,988 --
Interest 871,803 67,417 185,826 30,614 1,285,293
-----------------------------------------------------------------------
Total Investment Income 2,548,532 1,001,843 4,773,699 695,617 4,559,363
-----------------------------------------------------------------------
Expenses:
Investment advisory fees 1,240,063 262,273 1,443,804 226,078 325,086
Administration fees 618,843 167,202 602,839 94,451 240,200
Distribution fees - Class A 309,532 87,179 230,128 48,310 79,783
Distribution and service fees - Class C 238,299 44,148 415,679 32,842 190,135
Dividend expense on securities sold short -- -- 435,784 -- --
-----------------------------------------------------------------------
Total Expenses 2,406,737 560,802 3,128,234 401,681 835,204
-----------------------------------------------------------------------
Net Investment Income 141,795 441,041 1,645,465 293,936 3,724,159
-----------------------------------------------------------------------
Realized and Unrealized Gains (Losses)
on Investments
Net realized gains (losses) from security transactions:
Non-affiliated securities 6,070,948 826,223 3,166,349 562,835 (321,092)
Affiliated securities (24,485) -- (64,286) (10,916) --
Net realized losses on closed short positions -- -- (510,782) -- --
Net change in unrealized appreciation/depreciation
on Investments 16,538,473 6,001,089 28,139,410 (1,035,600) (2,177,920)
-----------------------------------------------------------------------
Net Realized and Unrealized Gains (Losses)
on Investments 22,584,936 6,827,312 30,730,691 (483,681) (2,499,012)
-----------------------------------------------------------------------
Net Change in Net Assets from Operations $ 22,726,731 $ 7,268,353 $ 32,376,156 $ (189,745) $ 1,225,147
=======================================================================
See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2005 Page 29
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,
2005 (A) 2004 2005 (B) 2004
------------------------------- -------------------------------
From Operations
Net investment income (loss) $ 141,795 $ (185,367) $ 441,041 $ 19,532
Net realized gains (losses) from investment transactions:
Non-affiliated securities 6,070,948 1,706,121 826,223 140,697
Affiliated securities (24,485) -- -- --
Net change in unrealized appreciation/depreciation on investments 16,538,473 7,605,261 6,001,089 2,354,692
------------------------------- --------------------------------
Net Change in Net Assets from Operations 22,726,731 9,126,015 7,268,353 2,514,921
------------------------------- --------------------------------
Distributions to Shareholders
From net investment income - Class A (88,670) -- (385,575) (19,316)
From net investment income - Class I (52,777) -- (52,388) --
From net realized gains on investments - Class A (2,332,978) (738,284) (204,951) --
From net realized gains on investments - Class C (341,473) (215,874) (22,510) --
From net realized gains on investments - Class I (198,862) -- (19,857) --
------------------------------- --------------------------------
Decrease in Net Assets from Distributions to Shareholders (3,014,760) (954,158) (685,281) (19,316)
------------------------------- --------------------------------
From Capital Transactions
Class A
Proceeds from shares sold 272,059,463 41,518,950 79,782,242 10,769,812
Reinvested distributions 2,281,094 680,943 566,483 18,311
Payments for shares redeemed (36,684,907) (4,499,378) (6,447,538) (2,125,728)
------------------------------- --------------------------------
Net Increase in Net Assets from Class A
Share Transactions 237,655,650 37,700,515 73,901,187 8,662,395
------------------------------- --------------------------------
Class C
Proceeds from shares sold 25,920,075 7,744,413 7,614,242 972,813
Reinvested distributions 291,659 178,794 20,057 --
Payments for shares redeemed (3,260,981) (2,256,124) (516,179) (370,165)
------------------------------- --------------------------------
Net Increase in Net Assets from Class C
Share Transactions 22,950,753 5,667,083 7,118,120 602,648
------------------------------- --------------------------------
Class I
Proceeds from shares sold 34,880,113 -- 9,959,881 --
Reinvested distributions 216,466 -- 72,245 --
Payments for shares redeemed (611,156) -- (106,505) --
------------------------------- --------------------------------
Net Increase in Net Assets from Class I
Share Transactions 34,485,423 -- 9,925,621 --
------------------------------- --------------------------------
Total Increase in Net Assets 314,803,797 51,539,455 97,528,000 11,760,648
Net Assets
Beginning of year 70,670,483 19,131,028 19,068,812 7,308,164
------------------------------- --------------------------------
End of year $ 385,474,280 $ 70,670,483 $ 116,596,812 $ 19,068,812
=============================== ===============================
Accumulated Net Investment Income (Loss) $ 138,005 $ -- $ 3,063 $ (15)
=============================== ===============================
(A) Except for Class I shares, which represents the period from commencement
of operations (April 29, 2005) through December 31, 2005.
(B) Except for Class I shares, which represents the period from commencement
of operations (January 31, 2005) through December 31, 2005.
See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
Page 30 Diamond Hill Funds Annual Report December 31, 2005
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,
2005 (A) 2004 2005 2004
------------------------------- --------------------------------
From Operations
Net investment income (loss) $ 1,645,465 $ (78,231) $ 293,936 $ 143,422
Net realized gains (losses) from security transactions:
Non-affiliated securities 3,166,349 739,886 562,835 1,895,553
Affiliated securities (64,286) -- (10,916) --
Net realized losses on closed short positions (510,782) (255,381) -- --
Net change in unrealized appreciation/depreciation on
investments 28,139,410 5,627,840 (1,035,600) 847,911
------------------------------- --------------------------------
Net Change in Net Assets from Operations 32,376,156 6,034,114 (189,745) 2,886,886
------------------------------- --------------------------------
Distributions to Shareholders
From net investment income - Class A (1,064,052) -- (277,083) (140,081)
From net investment income - Class C (110,997) -- (17,156) (8,546)
From net investment income - Class I (470,175) -- -- --
From net realized gains on investments - Class A (398,831) (187,721) (335,366) (1,589,088)
From net realized gains on investments - Class C (178,867) (89,742) (52,250) (321,817)
From net realized gains on investments - Class I (133,705) -- -- --
------------------------------- --------------------------------
Decrease in Net Assets from Distributions to Shareholders (2,356,627) (277,463) (681,855) (2,059,532)
------------------------------- --------------------------------
From Capital Transactions
Class A
Proceeds from shares sold 138,921,865 32,124,370 5,743,426 9,698,126
Reinvested distributions 1,341,912 172,712 556,551 1,596,642
Payments for shares redeemed (24,382,765) (5,554,803) (8,881,274) (3,809,143)
------------------------------- --------------------------------
Net Increase (Decrease) in Net Assets from Class A
Share Transactions 115,881,012 26,742,279 (2,581,297) 7,485,625
------------------------------- --------------------------------
Class C
Proceeds from shares sold 43,809,596 13,209,865 2,066,101 1,875,815
Reinvested distributions 246,770 74,950 61,907 239,539
Payments for shares redeemed (1,883,931) (572,651) (3,388,240) (241,394)
------------------------------- --------------------------------
Net Increase (Decrease) in Net Assets from Class C
Share Transactions 42,172,435 12,712,164 (1,260,232) 1,873,960
------------------------------- --------------------------------
Class I
Proceeds from shares sold 54,066,213 -- -- --
Reinvested distributions 451,130 -- -- --
Payments for shares redeemed (2,608,726) -- -- --
------------------------------- --------------------------------
Net Increase in Net Assets from Class I
Share Transactions 51,908,617 -- -- --
------------------------------- --------------------------------
Total Increase (Decrease) in Net Assets 239,981,593 45,211,094 (4,713,129) 10,186,939
Net Assets
Beginning of year 67,817,567 22,606,473 24,623,664 14,436,725
------------------------------- --------------------------------
End of year $ 307,799,160 $ 67,817,567 $ 19,910,535 $ 24,623,664
=============================== ================================
Undistributed Net Investment Income $ 241 $ -- $ 36,750 $ --
=============================== ================================
(A) Except for Class I shares, which represents the period from commencement
of operations (January 31, 2005) through December 31, 2005.
See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2005 Page 31
Diamond Hill Funds
Statements of Changes in Net Assets
Strategic Income Fund
------------------------------
For the Year For the Year
Ended Ended
December 31, December 31,
2005 (A) 2004
------------------------------
From Operations
Net investment income $ 3,724,159 $ 1,914,897
Net realized gains (losses) from investment transactions:
Non-affiliated securities (321,092) 153,733
Net change in unrealized appreciation/depreciation on investments (2,177,920) 484,083
------------------------------
Net Change in Net Assets from Operations 1,225,147 2,552,713
------------------------------
Distributions to Shareholders
From net investment income - Class A (1,813,171) (1,313,374)
From net investment income - Class C (949,813) (600,190)
From net investment income - Class I (935,928) --
From net realized gains on investments - Class A -- (339,459)
From net realized gains on investments - Class C -- (180,728)
------------------------------
Decrease in Net Assets from Distributions to Shareholders (3,698,912) (2,433,751)
------------------------------
From Capital Transactions
Class A
Proceeds from shares sold 18,458,705 15,351,676
Reinvested distributions 1,568,418 1,561,492
Payments for shares redeemed (18,749,601) (3,651,777)
------------------------------
Net Increase in Net Assets from Class A Share Transactions 1,277,522 13,261,391
------------------------------
Class C
Proceeds from shares sold 8,119,575 7,985,084
Reinvested distributions 716,306 520,557
Payments for shares redeemed (3,425,855) (1,403,789)
------------------------------
Net Increase in Net Assets from Class C Share Transactions 5,410,026 7,101,852
------------------------------
Class I
Proceeds from shares sold 25,428,393 --
Reinvested distributions 805,057 --
Payments for shares redeemed (268,673) --
-----------------------------
Net Increase in Net Assets from Class I Share Transactions 25,964,777 --
-----------------------------
Total Increase in Net Assets 30,178,560 20,482,205
Net Assets
Beginning of year 46,833,442 26,351,237
-----------------------------
End of year $ 77,012,002 $ 46,833,442
=============================
Accumulated Net Investment Income (Loss) $ 142,058 $ (25,253)
=============================
(A) Except for Class I shares, which represents the period from commencement
of operations (January 31, 2005) through December 31, 2005.
See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
Page 32 Diamond Hill Funds Annual Report December 31, 2005
Diamond Hill Funds
Schedule of Capital Share Transactions
Small Cap Fund Large Cap Fund
-------------------------------------------------------------
For the For the For the For the
Year Year Year Year
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
2005 (A) 2004 2005 (B) 2004
-------------------------------------------------------------
Shares
Class A Shares:
Issued 11,884,617 2,087,749 5,750,819 955,717
Reinvested 95,244 32,519 39,239 1,464
Redeemed (1,670,736) (241,171) (485,251) (191,825)
-------------------------------------------------------------
Net increase in shares outstanding 10,309,125 1,879,097 5,304,807 765,356
Shares outstanding, beginning of year 2,587,659 708,562 1,387,914 622,558
-------------------------------------------------------------
Shares outstanding, end of year 12,896,784 2,587,659 6,692,721 1,387,914
-------------------------------------------------------------
Class C Shares:
Issued 1,190,447 409,298 573,027 84,443
Reinvested 12,631 8,790 1,423 --
Redeemed (155,648) (122,519) (40,015) (31,364)
-------------------------------------------------------------
Net increase in shares outstanding 1,047,430 295,569 534,435 53,079
Shares outstanding, beginning of year 734,018 438,449 138,159 85,080
-------------------------------------------------------------
Shares outstanding, end of year 1,781,448 734,018 672,594 138,159
-------------------------------------------------------------
Class I Shares:
Issued 1,494,015 -- 724,463 --
Reinvested 9,017 -- 4,992 --
Redeemed (25,959) -- (7,595) --
-------------------------------------------------------------
Net increase in shares outstanding 1,477,073 -- 721,860 --
Shares outstanding, beginning of
period -- -- -- --
-------------------------------------------------------------
Shares outstanding, end of period 1,477,073 -- 721,860 --
-------------------------------------------------------------
Focus Long-Short Fund
------------------------------------
For the For the
Year Year
Ended Ended
December 31, December 31,
2005 (B) 2004
------------------------------------
Shares
Class A Shares:
Issued 9,071,724 2,482,880
Reinvested 81,901 12,708
Redeemed (1,656,054) (437,611)
------------------------------------
Net increase in shares outstanding 7,497,571 2,057,977
Shares outstanding, beginning of year 3,438,704 1,380,727
------------------------------------
Shares outstanding, end of year 10,936,275 3,438,704
------------------------------------
Class C Shares:
Issued 2,998,042 1,052,287
Reinvested 15,703 5,687
Redeemed (129,880) (45,118)
------------------------------------
Net increase in shares outstanding 2,883,865 1,012,856
Shares outstanding, beginning of year 1,569,514 556,658
------------------------------------
Shares outstanding, end of year 4,453,379 1,569,514
------------------------------------
Class I Shares:
Issued 3,586,245 --
Reinvested 27,442 --
Redeemed (165,776) --
------------------------------------
Net increase in shares outstanding 3,447,911 --
Shares outstanding, beginning of
period -- --
------------------------------------
Shares outstanding, end of period 3,447,911 --
------------------------------------
Bank & Financial Fund Strategic Income Fund
----------------------------------------------------------
For the For the For the For the
Year Year Year Year
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
2005 2004 2005(B) 2004
----------------------------------------------------------
Shares
Class A Shares:
Issued 308,794 505,328 1,594,116 1,322,249
Reinvested 29,801 83,998 136,352 135,152
Redeemed (482,068) (201,754) (1,622,010) (316,659)
----------------------------------------------------------
Net increase (decrease) in shares outstanding (143,473) 387,572 108,458 1,140,742
Shares outstanding, beginning of year 1,082,988 695,416 2,688,398 1,547,656
----------------------------------------------------------
Shares outstanding, end of year 939,515 1,082,988 2,796,856 2,688,398
----------------------------------------------------------
Class C Shares:
Issued 115,039 100,714 701,596 687,860
Reinvested 3,444 13,122 62,364 45,052
Redeemed (189,834) (13,369) (299,549) (122,582)
----------------------------------------------------------
Net increase (decrease) in shares outstanding (71,351) 100,467 464,411 610,330
Shares outstanding, beginning of year 213,998 113,531 1,338,285 727,955
----------------------------------------------------------
Shares outstanding, end of year 142,647 213,998 1,802,696 1,338,285
----------------------------------------------------------
Class I Shares:
Issued -- -- 2,205,980 --
Reinvested -- -- 70,360 --
Redeemed -- -- (23,452) --
----------------------------------------------------------
Net increase in shares outstanding -- -- 2,252,888 --
Shares outstanding, beginning of period -- -- -- --
----------------------------------------------------------
Shares outstanding, end of period -- -- 2,252,888 --
----------------------------------------------------------
(A) Except for Class I shares, which represents the period from commencement
of operations (April 29, 2005) through December 31, 2005.
(B) Except for Class I shares, which represents the period from commencement
of operations (January 31, 2005) through December 31, 2005.
See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2005 Page 33
Diamond Hill Funds
Financial Highlights
For a share outstanding throughout each period.
Year Ended Year Ended Year Ended Year Ended Period Ended
December 31, December 31, December 31, December 31, December 31,
Diamond Hill Small Cap Fund - Class A 2005 2004 2003 2002 2001(A)
-----------------------------------------------------------------------------
Net asset value at beginning of period $ 21.41 $ 16.82 $ 11.26 $ 12.29 $ 11.26
-----------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income (loss) 0.02 (0.03) (0.06) (0.17) (0.03)
Net realized and unrealized gains
(losses) on investments 2.74 4.94 5.71 (0.84) 1.31
-----------------------------------------------------------------------------
Total from investment operations 2.76 4.91 5.65 (1.01) 1.28
-----------------------------------------------------------------------------
Less Distributions:
Dividends from net investment income (0.01) -- -- -- (0.01)
Distributions from net realized gains (0.21) (0.32) (0.09) (0.02) (0.24)
-----------------------------------------------------------------------------
Total distributions (0.22) (0.32) (0.09) (0.02) (0.25)
-----------------------------------------------------------------------------
Net asset value at end of period $ 23.95 $ 21.41 $ 16.82 $ 11.26 $ 12.29
=============================================================================
Total return(C) 12.90% 29.26% 50.18% (8.23%) 11.42% (D)
=============================================================================
Net assets at end of period (000s) $ 308,925 $ 55,411 $ 11,919 $ 6,603 $ 5,315
=============================================================================
Ratio of net expenses to average net assets 1.45% 1.50% 1.50% 1.50% 1.58% (E)
Ratio of net investment income (loss) to
average net assets 0.19% (0.35%) (0.57%) (0.70%) (0.35%)(E)
Ratio of gross expenses to average net assets 1.45% 1.51% 1.51% 1.53% 1.67% (E)
Portfolio turnover rate 15% 30% 53% 49% 43% (E)
Period Ended
February 28,
Diamond Hill Small Cap Fund - Class A 2001 (B)
----------------
Net asset value at beginning of period $ 10.00
----------------
Income (loss) from investment operations:
Net investment income (loss) 0.02
Net realized and unrealized gains
(losses) on investments 1.24
----------------
Total from investment operations 1.26
----------------
Less Distributions:
Dividends from net investment income --
Distributions from net realized gains --
----------------
Total distributions --
----------------
Net asset value at end of period $ 11.26
================
Total return(C) 12.60%(D)
================
Net assets at end of period (000s) $ 1,657
================
Ratio of net expenses to average net assets 1.75%(E)
Ratio of net investment income (loss) to
average net assets 2.71%(E)
Ratio of gross expenses to average net assets 2.94%(E)
Portfolio turnover rate 3%(E)
Year Ended Year Ended Year Ended Year Ended Period Ended
December 31, December 31, December 31, December 31, December 31,
Diamond Hill Small Cap Fund - Class C 2005 2004 2003 2002 2001 (A)
-------------------------------------------------------------------------
Net asset value at beginning of period $ 20.79 $ 16.45 $ 11.09 $ 12.21 $ 11.26
-------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment loss (0.08) (0.15) (0.18) (0.23) (0.05)
Net realized and unrealized gains (losses)
on investments 2.58 4.81 5.63 (0.87) 1.24
-------------------------------------------------------------------------
Total from investment operations 2.50 4.66 5.45 (1.10) 1.19
-------------------------------------------------------------------------
Distributions from net realized gains (0.21) (0.32) (0.09) (0.02) (0.24)
-------------------------------------------------------------------------
Net asset value at end of period $ 23.08 $ 20.79 $ 16.45 $ 11.09 $ 12.21
=========================================================================
Total return(C) 12.05% 28.40% 49.15% (9.02%) 10.66% (D)
=========================================================================
Net assets at end of period (000s) $ 41,115 $ 15,259 $ 7,213 $ 4,902 $ 1,284
=========================================================================
Ratio of net expenses to average net assets 2.20% 2.25% 2.25% 2.25% 2.26% (E)
Ratio of net investment income (loss) to average
net assets (0.61%) (1.20%) (1.35%) (1.40%) (1.15%)(E)
Ratio of gross expenses to average net assets 2.20% 2.26% 2.26% 2.28% 2.35% (E)
Portfolio turnover rate 15% 30% 53% 49% 43% (E)
Period Ended
February 28,
Diamond Hill Small Cap Fund - Class C 2001 (F)
-----------------
Net asset value at beginning of period $ 11.39
-----------------
Income (loss) from investment operations:
Net investment loss --
Net realized and unrealized gains (losses)
on investments (0.13)
-----------------
Total from investment operations (0.13)
-----------------
Distributions from net realized gains --
-----------------
Net asset value at end of period $ 11.26
=================
Total return(C) (1.14%)(D)
=================
Net assets at end of period (000s) $ 20
=================
Ratio of net expenses to average net assets 2.50% (E)
Ratio of net investment income (loss) to average
net assets 0.80% (E)
Ratio of gross expenses to average net assets 3.97% (E)
Portfolio turnover rate 3% (E)
Period Ended
December 31,
Diamond Hill Small Cap Fund - Class I 2005(G)
---------------
Net asset value at beginning of period $ 19.93
---------------
Income from investment operations:
Net investment income 0.04
Net realized and unrealized gains on investments 4.27
---------------
Total from investment operations 4.31
---------------
Less Distributions:
Dividends from net investment income (0.04)
Distributions from net realized gains (0.21)
---------------
Total distributions (0.25)
---------------
Net asset value at end of period $ 23.99
===============
Total return 21.63%(D)
===============
Net assets at end of period (000s) $ 35,434
===============
Ratio of net expenses to average net assets 0.99%(E)
Ratio of net investment income to average net assets 0.74%(E)
Ratio of gross expenses to average net assets 0.99%(E)
Portfolio turnover rate 15%
(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.
(F) Class C commenced operations on February 20, 2001.
(G) Class I commenced operations on April 29, 2005.
See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
Page 34 Diamond Hill Funds Annual Report December 31, 2005
Diamond Hill Funds
Financial Highlights
For a share outstanding throughout each period.
Year Ended Year Ended Year Ended Year Ended Period Ended
December 31, December 31, December 31, December 31, December 31,
Diamond Hill Large Cap Fund - Class A 2005 2004 2003 2002 2001 (A)
----------------------------------------------------------------------------
Net asset value at beginning of period $ 12.51 $ 10.34 $ 7.87 $ 10.06 $ 10.00
----------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.05 0.02 0.04 0.04 0.01
Net realized and unrealized gains (losses) on
investments 1.98 2.16 2.47 (2.13) 0.06
----------------------------------------------------------------------------
Total from investment operations 2.03 2.18 2.51 (2.09) 0.07
----------------------------------------------------------------------------
Less Distributions:
Dividends from net investment income (0.06) (0.01) (0.04) (0.04) (0.01)
Distributions from net realized gains (0.04) -- -- (0.06) --
----------------------------------------------------------------------------
Total distributions (0.10) (0.01) (0.04) (0.10) (0.01)
----------------------------------------------------------------------------
Net asset value at end of period $ 14.44 $ 12.51 $ 10.34 $ 7.87 $ 10.06
============================================================================
Total return(B) 16.19% 21.12% 31.92% (20.74%) 0.69%(C)
============================================================================
Net assets at end of period (000s) $ 96,637 $ 17,369 $ 6,437 $ 3,300 $ 2,782
============================================================================
Ratio of net expenses to average net assets 1.27% 1.40% 1.39% 1.40% 1.40%(D)
Ratio of net investment income to average net assets 1.08% 0.26% 0.62% 0.62% 0.38%(D)
Ratio of gross expenses to average net assets 1.27% 1.42% 1.43% 1.46% 1.57%(D)
Portfolio turnover rate 15% 13% 32% 71% 19%(D)
Year Ended Year Ended Year Ended Year Ended Period Ended
December 31, December 31, December 31, December 31, December 31,
Diamond Hill Large Cap Fund - Class C 2005 2004 2003 2002 2001 (E)
---------------------------------------------------------------------------
Net asset value at beginning of period $ 12.31 $ 10.23 $ 7.81 $ 10.06 $ 8.87
---------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income (loss) 0.05 (0.04) -- -- (0.01)
Net realized and unrealized gains (losses)
on investments 1.83 2.12 2.42 (2.19) 1.20
---------------------------------------------------------------------------
Total from investment operations 1.88 2.08 2.42 (2.19) 1.19
---------------------------------------------------------------------------
Distributions from net realized gains (0.04) -- -- (0.06) --
---------------------------------------------------------------------------
Net asset value at end of period $ 14.15 $ 12.31 $ 10.23 $ 7.81 $ 10.06
===========================================================================
Total return(B) 15.25% 20.33% 31.04% (21.73%) 13.42% (C)
===========================================================================
Net assets at end of period (000s) $ 9,518 $ 1,700 $ 871 $ 260 $ 262
===========================================================================
Ratio of net expenses to average net assets 2.02% 2.15% 2.14% 2.15% 2.15% (D)
Ratio of net investment loss to average net assets 0.26% (0.54%) (0.14%) (0.10%) (0.41%)(D)
Ratio of gross expenses to average net assets 2.02% 2.17% 2.18% 2.81% 2.32% (D)
Portfolio turnover rate 15% 13% 32% 71% 19% (D)
Period Ended
December 31,
Diamond Hill Large Cap Fund - Class I 2005 (F)
---------------
Net asset value at beginning of period $ 12.38
---------------
Income from investment operations:
Net investment income 0.08
Net realized and unrealized gains on investments 2.13
---------------
Total from investment operations 2.21
---------------
Less Distributions:
Dividends from net investment income (0.08)
Distributions from net realized gains (0.04)
---------------
Total distributions (0.12)
---------------
Net asset value at end of period $ 14.47
===============
Total return 17.84%(C)
===============
Net assets at end of period (000s) $ 10,442
===============
Ratio of net expenses to average net assets 0.80%(D)
Ratio of net investment loss to average net assets 1.60%(D)
Ratio of gross expenses to average net assets 0.80%(D)
Portfolio turnover rate 15%
(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.
(E) Class C commenced operations on September 25, 2001.
(F) Class I commenced operations on January 31, 2005.
See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2005 Page 35
Diamond Hill Funds
Financial Highlights
For a share outstanding throughout each period.
Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31,
Diamond Hill Focus Long-Short Fund - Class A 2005 2004 2003 2002
-------------------------------------------------------------------------
Net asset value at beginning of period $ 13.67 $ 11.75 $ 9.56 $ 10.67
-------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income (loss) 0.10 0.00(C) (0.01) (0.06)
Net realized and unrealized gains (losses)
on investments 2.83 1.98 2.20 (1.05)
-------------------------------------------------------------------------
Total from investment operations 2.93 1.98 2.19 (1.11)
-------------------------------------------------------------------------
Less Distributions:
Dividends from net investment income (0.10) -- -- --
Distributions from net realized gains (0.04) (0.06) -- --
-------------------------------------------------------------------------
Total distributions (0.14) (0.06) -- --
-------------------------------------------------------------------------
Net asset value at end of period $ 16.46 $ 13.67 $ 11.75 $ 9.56
=========================================================================
Total return(D) 21.46% 16.86% 22.91% (10.40%)
=========================================================================
Net assets at end of period (000s) $ 180,035 $ 47,008 $ 16,216 $ 11,518
=========================================================================
Ratio of net expenses to average net assets 1.82% 1.78% 1.70% 1.60%
Ratio of net investment income (loss) to average
net assets 1.12% 0.01% (0.07%) (0.39%)
Ratio of gross expenses to average net assets 1.82% 1.79% 1.71% 1.63%
Ratio of net expenses to average net assets,
excluding dividends on securities sold short 1.55% 1.60% 1.59% 1.48%
Portfolio turnover rate 12% 18% 41% 46%
Period Ended Period Ended
December 31, February 28,
Diamond Hill Focus Long-Short Fund - Class A 2001 (A) 2001 (B)
-----------------------------------------
Net asset value at beginning of period $ 11.44 $ 10.00
-----------------------------------------
Income (loss) from investment operations:
Net investment income (loss) (0.04) --
Net realized and unrealized gains (losses)
on investments (0.56) 1.44
-----------------------------------------
Total from investment operations (0.60) 1.44
-----------------------------------------
Less Distributions:
Dividends from net investment income -- --
Distributions from net realized gains (0.17) --
-----------------------------------------
Total distributions (0.17) --
-----------------------------------------
Net asset value at end of period $ 10.67 $ 11.44
=========================================
Total return(D) (5.20%)(E) 14.43% (E)
=========================================
Net assets at end of period (000s) $ 10,988 $ 10,352
=========================================
Ratio of net expenses to average net assets 1.67% (F) 1.75% (F)
Ratio of net investment income (loss) to
average net assets (0.46%)(F) (0.05%)(F)
Ratio of gross expenses to average net assets 1.69% (F) 1.85% (F)
Ratio of net expenses to average net assets,
excluding dividends on securities sold short 1.67% (F) 1.75% (F)
Portfolio turnover rate 66% (F) 49% (F)
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
Diamond Hill Focus Long-Short Fund - Class C 2005 2004 2003
--------------------------------------------------------
Net asset value at beginning of period $ 13.26 $ 11.48 $ 9.42
--------------------------------------------------------
Income (loss) from investment operations:
Net investment income (loss) 0.03 (0.05) (0.04)
Net realized and unrealized gains (losses) on investments 2.70 1.89 2.10
--------------------------------------------------------
Total from investment operations 2.73 1.84 2.06
--------------------------------------------------------
Less Distributions:
Dividends from net investment income (0.03) -- --
Distributions from net realized gains (0.04) (0.06) --
--------------------------------------------------------
Total distributions (0.07) (0.06) --
--------------------------------------------------------
Net asset value at end of period $ 15.92 $ 13.26 $ 11.48
========================================================
Total return(D) 20.58% 16.04% 21.87%
========================================================
Net assets at end of period (000s) $ 70,891 $ 20,810 $ 6,390
========================================================
Ratio of net expenses to average net assets 2.57% 2.53% 2.45%
Ratio of net investment income (loss) to average net assets 0.37% (0.73%) (0.75%)
Ratio of gross expenses to average net assets 2.57% 2.54% 2.46%
Ratio of net expenses to average net assets, excluding
dividends on securities sold short 2.30% 2.35% 2.34%
Portfolio turnover rate 12% 18% 41%
Year Ended Period Ended Period Ended
December 31, December 31, February 28,
Diamond Hill Focus Long-Short Fund - Class C 2002 2001 (A) 2001 (B)
---------------------------------------------------------------
Net asset value at beginning of period $ 10.60 $ 11.44 $ 11.80
---------------------------------------------------------------
Income (loss) from investment operations:
Net investment income (loss) (0.29) (0.07) --
Net realized and unrealized gains (losses) on investments (0.89) (0.60) (0.36)
---------------------------------------------------------------
Total from investment operations (1.18) (0.67) (0.36)
---------------------------------------------------------------
Less Distributions:
Dividends from net investment income -- -- --
Distributions from net realized gains -- (0.17) --
---------------------------------------------------------------
Total distributions -- (0.17) --
---------------------------------------------------------------
Net asset value at end of period $ 9.42 $ 10.60 $ 11.44
===============================================================
Total return(D) (11.13%) (5.81%)(E) (3.05%)(E)
===============================================================
Net assets at end of period (000s) $ 2,168 $ 2,198 $ 349
===============================================================
Ratio of net expenses to average net assets 2.35% 2.38% (F) 2.50% (F)
Ratio of net investment income (loss) to average net assets (1.15%) (1.15%)(F) 1.57% (F)
Ratio of gross expenses to average net assets 2.38% 2.41% (F) 4.10% (F)
Ratio of net expenses to average net assets, excluding
dividends on securities sold short 2.23% 2.38% (F) 2.50% (F)
Portfolio turnover rate 46% 66% (F) 49% (F)
Period Ended
December 31,
Diamond Hill Focus Long-Short Fund - Class I 2005 (B)
------------------
Net asset value at beginning of period $ 13.80
------------------
Income from investment operations:
Net investment income 0.14
Net realized and unrealized gains on investments 2.73
------------------
Total from investment operations 2.87
------------------
Less Distributions:
Dividends from net investment income (0.14)
Distributions from net realized gains (0.04)
------------------
Total distributions (0.18)
------------------
Net asset value at end of period $ 16.49
==================
Total return 20.81%(E)
==================
Net assets at end of period (000s) $ 56,873
==================
Ratio of net expenses to average net assets 1.39%(F)
Ratio of net investment income (loss) to average net assets 1.71%(F)
Ratio of gross expenses to average net assets 1.39%(F)
Ratio of net expenses to average net assets, excluding
dividends on securities sold short 1.10%(F)
Portfolio turnover rate 12%
(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.
Class C and Class I commenced operations on February 13, 2001 and January
31, 2005, respectively.
(C) Amount rounds to less than $ 0.005.
(D) Total returns shown exclude the effect of applicable sales charges.
(E) Not annualized.
(F) Annualized.
See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
Page 36 Diamond Hill Funds Annual Report December 31, 2005
Diamond Hill Funds
Financial Highlights
For a share outstanding throughout each period.
Year Ended Year Ended Year Ended Year Ended
Diamond Hill Bank & December 31, December 31, December 31, December 31,
Financial Fund - Class A 2005 2004 2003 2002
---------------------------------------------------------------------
Net asset value at beginning of period $ 19.10 $ 17.92 $ 13.63 $ 14.25
Income (loss) from investment operations:
Net investment income (loss) 0.29 0.13 0.07 0.03
Net realized and unrealized gains (losses)
on investments (0.24) 2.84 5.60 1.58
---------------------------------------------------------------------
Total from investment operations 0.05 2.97 5.67 1.61
---------------------------------------------------------------------
Less Distributions:
Dividends from net investment income (0.30) (0.13) (0.06) (0.03)
Distributions from net realized gains (0.37) (1.66) (1.32) (2.20)
---------------------------------------------------------------------
Total distributions (0.67) (1.79) (1.38) (2.23)
---------------------------------------------------------------------
Net asset value at end of period $ 18.48 $ 19.10 $ 17.92 $ 13.63
=====================================================================
Total return(B) 0.25% 16.67% 41.85% 11.22%
=====================================================================
Net assets at end of period (000s) $ 17,366 $ 20,682 $ 12,463 $ 9,983
=====================================================================
Ratio of net expenses to average net assets 1.67% 1.70% 1.68% 1.70%
Ratio of net investment income (loss)
to average net assets 1.41% 0.90% 0.45% 0.20%
Ratio of gross expenses to average net assets 1.67% 1.71% 1.70% 1.72%
Portfolio turnover rate 28% 36% 53% 104%
Period Ended Year Ended
Diamond Hill Bank & December 31, February 28,
Financial Fund - Class A 2001(A) 2001
------------------------------------
Net asset value at beginning of period $ 11.85 $ 9.40
Income (loss) from investment operations:
Net investment income (loss) -- (0.02)
Net realized and unrealized gains (losses)
on investments 2.40 2.47
------------------------------------
Total from investment operations 2.40 2.45
------------------------------------
Less Distributions:
Dividends from net investment income -- --
Distributions from net realized gains -- --
------------------------------------
Total distributions -- --
------------------------------------
Net asset value at end of period $ 14.25 $ 11.85
====================================
Total return(B) 20.25% (C) 26.06%
====================================
Net assets at end of period (000s) $ 13,214 $ 11,772
====================================
Ratio of net expenses to average net assets 1.72% (D) 1.81%
Ratio of net investment income (loss)
to average net assets (0.03%)(D) (0.25%)
Ratio of gross expenses to average net assets 1.74% (D) 1.88%
Portfolio turnover rate 52% (D) 142%
Year Ended Year Ended Year Ended Year Ended
Diamond Hill Bank & December 31, December 31, December 31, December 31,
Financial Fund - Class C 2005 2004 2003 2002
----------------------------------------------------------------------
Net asset value at beginning of period $ 18.42 $ 17.39 $ 13.31 $ 14.05
----------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income (loss) 0.15 0.03 (0.06) 0.04
Net realized and unrealized gains (losses)
on investments (0.24) 2.70 5.46 1.46
----------------------------------------------------------------------
Total from investment operations (0.09) 2.73 5.40 1.50
----------------------------------------------------------------------
Less Distributions:
Dividends from net investment income (0.12) (0.04) -- (0.04)
Distributions from net realized gains (0.37) (1.66) (1.32) (2.20)
----------------------------------------------------------------------
Total distributions (0.49) (1.70) (1.32) (2.24)
----------------------------------------------------------------------
Net asset value at end of period $ 17.84 $ 18.42 $ 17.39 $ 13.31
======================================================================
Total return(B) (0.49%) 15.79% 40.85% 10.55%
======================================================================
Net assets at end of period (000s) $ 2,544 $ 3,941 $ 1,974 $ 787
======================================================================
Ratio of net expenses to average net assets 2.42% 2.45% 2.45% 2.45%
Ratio of net investment income (loss)
to average net assets 0.67% 0.20% (0.30%) (0.49%)
Ratio of gross expenses to average net assets 2.42% 2.46% 2.47% 2.47%
Portfolio turnover rate 28% 36% 53% 104%
Period Ended Year Ended
Diamond Hill Bank & December 31, February 28,
Financial Fund - Class C 2001(A) 2001
------------------------------------
Net asset value at beginning of period $ 11.72 $ 9.34
------------------------------------
Income (loss) from investment operations:
Net investment income (loss) (0.11) (0.07)
Net realized and unrealized gains (losses)
on investments 2.44 2.45
------------------------------------
Total from investment operations 2.33 2.38
------------------------------------
Less Distributions:
Dividends from net investment income -- --
Distributions from net realized gains -- --
------------------------------------
Total distributions -- --
------------------------------------
Net asset value at end of period $ 14.05 $ 11.72
====================================
Total return(B) 19.88% (C) 25.48%
====================================
Net assets at end of period (000s) $ 127 $ 129
====================================
Ratio of net expenses to average net assets 2.47% (D) 2.56%
Ratio of net investment income (loss)
to average net assets (0.77%)(D) (0.97%)
Ratio of gross expenses to average net assets 2.49% (D) 2.63%
Portfolio turnover rate 52% (D) 142%
(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.
See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2005 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 Strategic Income Fund - Class A 2005 2004 2003 2002 (A)
======================================================================
Net asset value at beginning of period $ 11.63 $ 11.58 $ 10.28 $ 10.00
----------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.66 0.64 0.67 0.15
Net realized and unrealized gains (losses) on investments (0.38) 0.19 1.39 0.3
----------------------------------------------------------------------
Total from investment operations 0.28 0.83 2.06 0.45
----------------------------------------------------------------------
Less distributions
Dividends from net investment income (0.66) (0.64) (0.67) (0.15)
Distributions from net realized gains -- (0.14) (0.09) (0.02)
----------------------------------------------------------------------
Total distributions (0.66) (0.78) (0.76) (0.17)
----------------------------------------------------------------------
Net asset value at end of period $ 11.25 $ 11.63 $ 11.58 $ 10.28
======================================================================
Total return(B) 2.41% 7.46% 20.67% 4.49%(C)
======================================================================
Net assets at end of period (000s) $ 31,456 $ 31,274 $ 17,923 $ 2,092
======================================================================
Ratio of net expenses to average net assets 1.17% 1.20% 1.19% 1.20%(D)
Ratio of net investment income to average net assets 5.74% 5.75% 6.01% 1.76%(D)
Ratio of gross expenses to average net assets 1.17% 1.21% 1.21% 1.23%(D)
Portfolio turnover rate 66% 84% 83% 77%(D)
Year Ended Year Ended Year Ended Period Ended
December 31, December 31, December 31, December 31,
Diamond Hill Strategic Income Fund - Class C 2005 2004 2003 2002 (A)
======================================================================
Net asset value at beginning of period $ 11.63 $ 11.58 $ 10.28 $ 10.00
----------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.58 0.56 0.60 0.19
Net realized and unrealized gains (losses) on investments (0.40) 0.19 1.39 0.30
----------------------------------------------------------------------
Total from investment operations 0.18 0.75 1.99 0.49
----------------------------------------------------------------------
Less distributions
Dividends from net investment income (0.57) (0.56) (0.60) (0.19)
Distributions from net realized gains -- (0.14) (0.09) (0.02)
----------------------------------------------------------------------
Total distributions (0.57) (0.70) (0.69) (0.21)
----------------------------------------------------------------------
Net asset value at end of period $ 11.24 $ 11.63 $ 11.58 $ 10.28
======================================================================
Total return(B) 1.57% 6.70% 19.86% 4.85%(C)
======================================================================
Net assets at end of period (000s) $ 20,257 $ 15,560 $ 8,428 $ 94
======================================================================
Ratio of net expenses to average net assets 1.91% 1.95% 1.93% 1.95%(D)
Ratio of net investment income to average net assets 5.06% 5.02% 5.39% 2.64%(D)
Ratio of gross expenses to average net assets 1.91% 1.96% 1.95% 1.98%(D)
Portfolio turnover rate 66% 84% 83% 77%(D)
Period Ended
December 31,
Diamond Hill Strategic Income Fund - Class I 2005 (E)
================
Net asset value at beginning of period $ 11.65
----------------
Income (loss) from investment operations:
Net investment income 0.65
Net realized and unrealized losses on investments (0.42)
----------------
Total from investment operations 0.23
----------------
Dividends from net investment income (0.65)
----------------
Net asset value at end of period $ 11.23
================
Total return 2.03%(C)
================
Net assets at end of period (000s) $ 25,299
================
Ratio of net expenses to average net assets 0.70%(D)
Ratio of net investment income to average net assets 6.57%(D)
Ratio of gross expenses to average net assets 0.70%(D)
Portfolio turnover rate 66%
(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.
(E) Represents the period from commencement of operations (January 31, 2005)
through December 31, 2005.
See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
Page 38 Diamond Hill Funds Annual Report December 31, 2005
Diamond Hill Funds
Notes to Financial Statements
December 31, 2005
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"), and Diamond Hill Strategic
Income Fund ("Strategic 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. Effective December 30,
2005, the Small Cap Fund closed to new shareholders.
The Funds offer three classes of shares (Class A, Class C and Class I, except
for the Bank & Financial Fund which offers Class A and Class C 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 for which market
quotations are not readily available are valued at their "fair value". In these
cases, a Valuation Committee established and appointed by the Trustees
determines in good faith, subject to Trust procedures, the fair value of
portfolio securities held by a Fund ("good faith fair valuation"). When a good
faith fair valuation of a security is required, consideration is generally given
to a number of factors, including, but not limited to the following: dealer
quotes, published analyses by dealers or analysts of the situation at issue,
transactions implicitly valuing the security (such as a merger, tender offer,
etc.), the value of other securities or contracts which derive their value from
the security at issue, and the implications (whether negative or positive) of
the circumstances which have caused trading in the security to halt.
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.
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2005 Page 39
Diamond Hill Funds
Notes to Financial Statements (Continued)
December 31, 2005
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.
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. 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. The Funds record
distributions received from investments in Real Estate Investment Trusts (REITS)
in excess of income from underlying investments as a reduction of cost of
investments and/or realized gain. Such amounts are based on estimates if actual
amounts are not available and actual amounts of income, realized gain and return
of capital may differ from the estimated amounts. The Funds adjust the estimated
amounts of the components of distributions (and consequently net investment
income) as an increase to unrealized appreciation (depreciation) and realized
gain (loss) on investments as necessary once the issuers provide information
about the actual composition of the distributions. 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 carryforwards, 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, 2005, 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 $208,948,554 $ 16,390,954
Large Cap Fund $ 83,379,869 $ 5,680,336
Focus Fund $171,058,464 $ 15,662,956
Bank & Financial Fund $ 5,678,216 $ 6,602,866
Strategic Income Fund $ 58,745,526 $ 34,846,863
The Small Cap Fund, Large Cap Fund, Focus Fund, and Bank & Financial Fund pay
commissions on the purchase and sale of investment securities. The commissions
paid are included as part of the cost of purchases or net proceeds on the sale
of investment securities and are not included in the presentation of Fund
expenses on the Statements of Operations. The Strategic Income Fund is not
included in the table below because in general there are no stated commissions
attributable to fixed income securities. The Funds paid the following
commissions during the year ended December 31, 2005:
Commissions as a %
Total Commissions of Average Net Assets
----------------- ---------------------
Small Cap Fund $ 150,718 .10%
Large Cap Fund $ 42,347 .10%
Focus Fund $ 285,429 .18%
Bank & Financial Fund $ 5,969 .03%
- --------------------------------------------------------------------------------
Page 40 Diamond Hill Funds Annual Report December 31, 2005
Diamond Hill Funds
Notes to Financial Statements (Continued)
December 31, 2005
Investment Advisory Fees and Other Transactions with Affiliates
The Small Cap Fund, Large Cap Fund, Focus Fund, Bank & Financial Fund, and
Strategic 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%, 0.60%, 0.90%,
1.00%, and 0.50% of the Funds' average daily net assets, respectively. Prior to
May 1, 2005, the fees paid by the Large Cap Fund were paid at an annual rate of
0.70% 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 0.40% for Class A and Class C and 0.20% for
Class I shares of each Funds' average daily net assets. Prior to May 1, 2005,
the fees paid by Class A and Class C were paid 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, and extraordinary expenses.
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. The
Trust entered into a Distribution Agreement on behalf of the Funds with IFS Fund
Distributors, Inc. ("Distributor"). Pursuant to the Distribution Agreement, the
Distributor acts as principal underwriter of each Fund's shares.
For the year ended December 31, 2005, the Distributor received $96,823, $11,621,
$82,857, $11,078, and $8,842, 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 Distributor also received $7,705,
$1,236, $8,947, $7,739, and $6,474 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 were each allowed to invest up to 25% of their respective
assets in the Diamond Hill Short Term Fixed Income Fund, prior to its
termination on September 14, 2005, 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 were
invested in the Diamond Hill Short Term Fixed Income Fund, the Adviser and
Administrator were paid additional fees from the Diamond Hill Short Term Fixed
Income Fund that were not waived or reimbursed.
A summary of each Fund's investment in the Diamond Hill Short Term Fixed Income
Fund, if any, for the year ended December 31, 2005, is noted below:
SHARE ACTIVITY
---------------------------------------------------
Balance Balance Realized Value
12/31/04 Purchases Sales 12/31/05 Loss Dividends 12/31/05
-------------------------------------------------------------------------------------------
Small Cap Fund:
Diamond Hill Short Term
Fixed Income Fund 282,356 4,894 (287,250) -- $ (24,485) $ 48,206 $ --
Focus Fund:
Diamond Hill Short Term
Fixed Income Fund 457,995 7,916 (465,911) -- $ (64,286) $ 77,899 $ --
Bank & Financial Fund:
Diamond Hill Short Term
Fixed Income Fund 62,278 916 (63,194) -- $ (10,916) $ 8,988 $ --
Certain officers of the Trust are affiliated with DHCM, IFS or the Distributor.
Such officers receive no compensation from the Funds for serving in their
respective roles.
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2005 Page 41
Diamond Hill Funds
Notes to Financial Statements (Continued)
December 31, 2005
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 2005 and 2004 was as follows:
Small Cap Fund Large Cap Fund
--------------------------- ---------------------------
2005 2004 2005 2004
--------------------------- ---------------------------
Distributions paid from:
Ordinary income $ 141,447 $ -- $ 437,963 $ 19,316
Long-term capital gains 3,224,408 1,076,659 265,273 --
--------------------------- ---------------------------
Total distributions $ 3,365,855 $ 1,076,659 $ 703,236 $ 19,316
--------------------------- ---------------------------
Focus Fund Bank & Financial Fund
--------------------------- ---------------------------
2005 2004 2005 2004
--------------------------- ---------------------------
Distributions paid from:
Ordinary income $ 1,645,224 $ -- $ 273,912 $ 501,632
Long-term capital gains 840,687 278,162 626,653 1,850,777
--------------------------- ---------------------------
Total distributions $ 2,485,911 $ 278,162 $ 900,565 $ 2,352,409
--------------------------- ---------------------------
Strategic Income Fund
---------------------------
2005 2004
---------------------------
Distributions paid from:
Ordinary income $ 3,601,032 $ 2,213,360
Long-term capital gains 97,880 220,391
---------------------------
Total distributions $ 3,698,912 $ 2,433,751
---------------------------
The following information is computed on a tax basis for each item as of
December 31, 2005:
Bank & Strategic
Small Large Focus Financial Income
Cap Fund Cap Fund Fund Fund Fund
--------------------------------------------------------------------------------------
Federal tax cost of investments $ 356,246,144 $ 105,407,663 $ 251,127,880 $ 16,747,626 $ 77,549,156
--------------------------------------------------------------------------------------
Gross unrealized appreciation $ 36,113,620 $ 11,614,918 $ 48,871,309 $ 3,619,595 $ 1,186,421
Gross unrealized depreciation (6,726,184) (1,802,292) (11,005,344) (335,154) (1,926,114)
--------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) 29,387,436 9,812,626 37,865,965 3,284,441 (739,693)
Undistributed net investment income 130,833 77,590 894,064 -- --
Undistributed long-term gains 2,891,436 197,484 852,047 40,581 --
Post-October losses -- -- -- -- (329,831)
Other temporary differences -- -- -- -- 92,786
--------------------------------------------------------------------------------------
Total accumulated earnings (deficit) $ 32,409,705 $ 10,087,700 $ 38,077,438 $ 3,325,022 $ (976,738)
======================================================================================
- --------------------------------------------------------------------------------
Page 42 Diamond Hill Funds Annual Report December 31, 2005
Diamond Hill Funds
Notes to Financial Statements (Continued)
December 31, 2005
The difference between book basis and tax basis net unrealized appreciation
(depreciation) is attributable primarily to the tax deferral of losses on wash
sales and investments in Real Estate Investment Trusts.
Reclassification of capital accounts - Reclassifications result primarily from
the difference in the tax treatment of net investment losses, paydown gains and
losses and equalization. The following 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 $ 351,095 $ 137,657 $ (488,752)
Large Cap Fund $ 17,955 $ -- $ (17,955)
Focus Fund $ 129,284 $ -- $ (129,284)
Bank & Financial Fund $ 214,727 $ 37,053 $ (251,780)
Strategic Income Fund $ (167,563) $ 142,064 $ 25,499
During the year ended December 31, 2005, the Large Cap Fund utilized capital
loss carryforwards of $288,939.
Subsequent Event
Public offering commenced on January 3, 2006 for the Diamond Hill Small-Mid Cap
Fund and Diamond Hill Select Fund. Each Fund offers Class A, Class C and Class I
shares. The Funds had no investment operations and no public shareholders as of
December 31, 2005.
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2005 Page 43
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 (comprised of the
Diamond Hill Focus Long-Short Fund, Diamond Hill Small Cap Fund, Diamond Hill
Large Cap Fund, Diamond Hill Bank & Financial Fund, and Diamond Hill Strategic
Income Fund) (collectively, the "Funds") as of December 31, 2005, and the
related statements of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the three 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 each of the two years in the period ended December 31,
2002 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 audits to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material misstatement.
We were not engaged to perform an audit of the Funds' internal control over
financial reporting. Our audits included 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, 2005 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, 2005, and the results of their operations
for the year then ended, the changes in their net assets for each of the two
years in the period then ended, and the financial highlights for each of the
three years in the period then ended, in conformity with U.S. generally accepted
accounting principles.
/s/ Ernst & Young LLP
Cincinnati, Ohio
February 16, 2006
- --------------------------------------------------------------------------------
Page 44 Diamond Hill Funds Annual Report December 31, 2005
Diamond Hill Funds
Other Items (Unaudited)
December 31, 2005
Dividends Received Deduction
For corporate shareholders, the following ordinary dividends paid during the
year ended December 31, 2005 qualify for the corporate dividends received
deduction:
Small Cap Fund 100%
Large Cap Fund 100%
Focus Fund 77%
Bank & Financial Fund 99%
Strategic Income Fund 78%
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 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. 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.
Special Meeting of Shareholders
There was a special meeting of shareholders held on November 7, 2005, at which
the shareholders of the Trust were asked to consider the following two
proposals:
1. To elect the following three trustees to the Trust:
Number of % of Outstanding % of Shares
Shares Shares Voted
--------------------------------------------
Elizabeth P. Kessler
Affirmative 29,785,771 94.3% 99.7%
Against -- -- --
Abstain 82,560 0.3% 0.3%
------------ ------------
94.6% 100.0%
Thomas E. Line
Affirmative 29,796,432 94.3% 99.8%
Against -- -- --
Abstain 71,899 0.2% 0.2%
------------ ------------
94.5% 100.0%
George A. Skestos
Affirmative 29,728,231 94.1% 99.5%
Against -- -- --
Abstain 140,100 0.4% 0.5%
------------ ------------
94.5% 100.0%
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2005 Page 45
Diamond Hill Funds
Other Items (Unaudited)(Continued)
December 31, 2005
2. To approve a new management agreement to combine existing management
agreements into a single agreement for the Funds in the Trust:
Number of % of Outstanding % of Shares
Shares Shares Voted
---------------------------------------------
Small Cap Fund
Affirmative 2,106,557 24.8% 97.2%
Against 35,718 0.4% 1.6%
Abstain 25,921 0.3% 1.2%
Broker Non-votes 5,834,315 68.6% --
--------- ---------
94.1% 100.0%
Large Cap Fund
Affirmative 777,625 23.7% 99.1%
Against 1,574 0.1% 0.2%
Abstain 5,702 0.2% 0.7%
Broker Non-votes 2,430,135 74.0% --
--------- ---------
98.0% 100.0%
Focus Fund
Affirmative 3,414,325 27.7% 97.1%
Against 76,742 0.6% 2.2%
Abstain 23,950 0.2% 0.7%
Broker Non-votes 8,331,218 67.7% --
--------- ---------
96.2% 100.0%
Bank & Financial Fund
Affirmative 224,702 19.2% 92.0%
Against 15,889 1.4% 6.5%
Abstain 3,762 0.3% 1.5%
Broker Non-votes 778,037 66.6% --
--------- ---------
87.5% 100.0%
Strategic Income Fund
Affirmative 2,323,836 36.7% 99.0%
Against 16,060 0.3% 0.7%
Abstain 7,230 0.1% 0.3%
Broker Non-votes 3,435,032 54.3% --
--------- ---------
91.4% 100.0%
Proposal 2 did not pass because not enough shareholders cast their vote. Of the
votes cast, 97.7% were cast in favor of the proposal.
- --------------------------------------------------------------------------------
Page 46 Diamond Hill Funds Annual Report December 31, 2005
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 covered by this report if you invested $1,000 in the
Fund, using the Funds' actual return and operating expenses for the six months
ended December 31, 2005. 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, 2005, and one using
a hypothetical 5% annual return (2.5% for the reporting period).
Net Expense Beginning Ending
Ratio Account Account
Annualized Value Value Investment Distribution/
December 31, July 1, December 31, Advisory Administration Service Total Net
2005 2005 2005 Fees Fees Fees Expenses
- ----------------------------------------------------------------------------------------------------------------------------------
Small Cap Fund
Class A
Actual return 1.44% $ 1,000.00 $ 1,103.70 $ 4.21 $ 2.11 $ 1.32 $ 7.64
Hypothetical return 1.44% $ 1,000.00 $ 1,017.95 $ 4.04 $ 2.02 $ 1.26 $ 7.32
Class C
Actual return 2.19% $ 1,000.00 $ 1,099.80 $ 4.21 $ 2.11 $ 5.27 $ 11.59
Hypothetical return 2.19% $ 1,000.00 $ 1,014.17 $ 4.04 $ 2.02 $ 5.06 $ 11.12
Class I
Actual return 0.99% $ 1,000.00 $ 1,106.40 $ 4.22 $ 1.05 $ 0.00 $ 5.27
Hypothetical return 0.99% $ 1,000.00 $ 1,020.20 $ 4.05 $ 1.00 $ 0.00 $ 5.05
Large Cap Fund
Class A
Actual return 1.24% $ 1,000.00 $ 1,112.10 $ 3.17 $ 2.11 $ 1.32 $ 6.60
Hypothetical return 1.24% $ 1,000.00 $ 1,018.95 $ 3.03 $ 2.02 $ 1.26 $ 6.31
Class C
Actual return 1.99% $ 1,000.00 $ 1,108.40 $ 3.17 $ 2.11 $ 5.29 $ 10.57
Hypothetical return 1.99% $ 1,000.00 $ 1,015.18 $ 3.03 $ 2.02 $ 5.05 $ 10.10
Class I
Actual return 0.79% $ 1,000.00 $ 1,114.50 $ 3.17 $ 1.06 $ 0.00 $ 4.23
Hypothetical return 0.79% $ 1,000.00 $ 1,021.20 $ 3.04 $ 1.01 $ 0.00 $ 4.05
Focus Long-Short Fund
Class A
Actual return 1.82% $ 1,000.00 $ 1,131.80 $ 5.68 $ 2.52 $ 1.57 $ 9.77
Hypothetical return 1.82% $ 1,000.00 $ 1,016.04 $ 5.37 $ 2.38 $ 1.49 $ 9.24
Class C
Actual return 2.57% $ 1,000.00 $ 1,128.40 $ 5.39 $ 2.39 $ 5.99 $ 13.77
Hypothetical return 2.57% $ 1,000.00 $ 1,012.27 $ 5.10 $ 2.26 $ 5.66 $ 13.02
Class I
Actual return 1.37% $ 1,000.00 $ 1,134.10 $ 6.03 $ 1.34 $ 0.00 $ 7.37
Hypothetical return 1.37% $ 1,000.00 $ 1,018.30 $ 5.70 $ 1.27 $ 0.00 $ 6.97
Bank & Financial Fund
Class A
Actual return 1.65% $ 1,000.00 $ 1,026.70 $ 5.12 $ 2.04 $ 1.28 $ 8.44
Hypothetical return 1.65% $ 1,000.00 $ 1,016.88 $ 5.09 $ 2.03 $ 1.27 $ 8.39
Class C
Actual return 2.40% $ 1,000.00 $ 1,022.90 $ 5.10 $ 2.04 $ 5.11 $ 12.25
Hypothetical return 2.40% $ 1,000.00 $ 1,013.09 $ 5.08 $ 2.03 $ 5.08 $ 12.19
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2005 Page 47
Diamond Hill Funds
Schedule of Shareholder Expenses
Hypothetical Example of a $1,000 Investment at Beginning of Period
(Unaudited) (Continued)
Net Expense Beginning Ending
Ratio Account Account
Annualized Value Value Investment Distribution/
December 31, July 1, December 31, Advisory Administration Service Total Net
2005 2005 2005 Fees Fees Fees Expenses
- ----------------------------------------------------------------------------------------------------------------------------------
Strategic Income Fund
Class A
Actual return 1.15% $ 1,000.00 $ 996.40 $ 2.51 $ 2.01 $ 1.26 $ 5.78
Hypothetical return 1.15% $ 1,000.00 $ 1,019.41 $ 2.54 $ 2.04 $ 1.27 $ 5.85
Class C
Actual return 1.90% $ 1,000.00 $ 991.80 $ 2.51 $ 2.01 $ 5.02 $ 9.54
Hypothetical return 1.90% $ 1,000.00 $ 1,015.63 $ 2.54 $ 2.03 $ 5.08 $ 9.65
Class I
Actual return 0.70% $ 1,000.00 $ 997.80 $ 2.52 $ 1.00 $ 0.00 $ 3.52
Hypothetical return 0.70% $ 1,000.00 $ 1,021.68 $ 2.54 $ 1.02 $ 0.00 $ 3.56
- ---------------------
You can find more informaiton 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 Fund's 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, 2005
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
Name/ Position(s) Term of Office(1) Portfolios in Fund
Address/(3) Held and Length of Complex Overseen
Age with Trust Time Served Principal Occupation(s) During Last 5 Years by Trustee
- -----------------------------------------------------------------------------------------------------------------------------------
Thomas E. Line Chairman Since November Managing Director and Chief Financial Officer, Red 5
Year of Birth: Trustee 2005 Capital Group (mortgage and investment banking
1967 subsidiary of National City Bank), October 2005 to
the present;Vice President and Treasurer, Red
Capital Group, September 2004 to October 2005;
President, Focused Financial Consulting, Inc.
(financial consulting), March 2002 to September
2004; Chief Operating Officer, Meeder Financial,
Inc. (parent of investment adviser and mutual fund
servicing companies), June 1998 to March 2002.
Elizabeth P. Trustee Since November Attorney - Jones Day 5
Kessler 2005
Year of Birth:
1968
George A. Skestos Trustee Since August 2000 Managing Member, Arcadia Holdings, LLC (private 5
Year of Birth: 1968 investment banking firm), May 2001 to the present;
President of Homewood Corporation (real estate
development firm), January 2000 to the present.
- -----------------------------------------------------------------------------------------------------------------------------------
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 Group, Inc.,
Year of Birth: 1957 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, Since May 2004 Controller of Diamond Hill Investment Group, Inc. since April
Year of Birth: 1968 Secretary and Since September 2004 2004. Director of Mutual Fund Administration with Banc One
Chief Compliance Investment Advisors October 1998 through April 2004. Vice
Officer 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, 2005 Page 49
[This page has been left blank intentionally.]
[This page has been left blank intentionally.]
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 has at
least one audit committee financial expert serving on its audit committee. Mr.
Thomas E. Line is the registrant's "audit committee financial expert" and is
"independent" (as each term is defined in Item 3 of Form N-CSR.
Item 4. Principal Accountant Fees and Services.
(a) Audit Fees. Audit fees totaled $62,000 for the December 31, 2005 fiscal year
and $57,600 for the December 31, 2004 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,
2005 or December 31, 2004 fiscal years.
(c) Tax Fees. Tax fees totaled $13,000 for the December 31, 2005 fiscal year and
$11,000 for the December 31, 2004 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, 2005 or
December 31, 2004 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 $13,000 for
the fiscal year ended December 31, 2005 and $11,000 for the fiscal year ended
December 31, 2004.
(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.
On August 18, 2005, the Board of Trustees of the Diamond Hill Funds adopted a
"Policy Regarding General Shareholder Communications to the Board of Trustees of
the Trust".
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
- --------------------------
James F. Laird
President
Date: March 3, 2006
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
- --------------------------
James F. Laird
President
Date: March 3, 2006
By (Signature and Title)
/s/ Gary R. Young
- --------------------------
Gary R. Young
Treasurer and Chief Financial Officer
Date: March 3, 2006