United States
Securities And Exchange Commission
Washington, D.C. 20549
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FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-8061
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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, Jr., 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
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Date of reporting period: 12/31/03 __________
Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. Section 3507.
Item 1. Reports to Stockholders.
Diamond Hill Funds Annual Report
[LOGO]
Diamond Hill Funds
Annual Report | December 31, 2003
Diamond Hill Focus Fund
Diamond Hill Small Cap Fund
Diamond Hill Large Cap Fund
Diamond Hill Bank & Financial Fund
Diamond Hill Short Term Fixed Income Fund
Diamond Hill Strategic Income Fund
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Not FDIC . MAY LOSE VALUE
Insured . NO BANK GUARANTEE
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Table of Contents
Letter to Shareholders 1
Mission Statement, Pledge & Fundamental Principles 5
Stock Market Outlook - Forecasting the Next Decade 6
Management Discussion of Fund Performance
Diamond Hill Focus Fund 10
Diamond Hill Small Cap Fund 12
Diamond Hill Large Cap Fund 14
Diamond Hill Bank & Financial Fund 16
Diamond Hill Short Term Fixed Income Fund 18
Diamond Hill Strategic Income Fund 20
Financial Statements
Schedules of Investments 22
Statements of Assets and Liabilities 31
Statements of Operations 32
Statements of Changes in Net Assets 33
Financial Highlights 36
Notes to Financial Statements 41
Report of Independent Auditors 47
Change in Independent Auditor 48
Management of the Trust 49
CAUTIONARY STATEMENT
At Diamond Hill, we pledge that,"we will communicate with our clients about our
investment performance in a manner that will allow them to properly assess
whether we are deserving of their trust." Our views and opinions regarding the
investment prospects of our portfolio holdings and Funds are "forward looking
statements" which may or may not be accurate over the long term. While we
believe we have a reasonable basis for our opinions, actual results may differ
materially from those we anticipate. Information provided in this report should
not be considered a recommendation to purchase or sell any particular security.
You can identify forward looking statements by words like "believe," "expect,"
"anticipate," or similar expressions when discussing prospects for particular
portfolio holdings and/or one of the Funds. We cannot assure future results. You
should not place undue reliance on forward-looking statements, which speak only
as of the date of this report. We disclaim any obligation to update or alter any
forward-looking statements, whether as a result of new information, future
events, or otherwise. This material must be 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 a 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 Funds Class A
shares relative to their benchmarks for 2003 and longer periods.
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Total Return
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Three Six One Three Five
Months Months Year Years Years
12/31/03 Ended Ended Ended Ended Ended
Fund Name NAV 12/31/03 12/31/03 12/31/03 12/31/2003/A/ 12/31/2003/A/
====================================================================================================================
Focus Fund (DIAMX) $11.75 10.43% 11.16% 22.91% 5.33% NA
Russell 3000 Index 12.43% 16.29% 31.06% -3.08%
Small Cap Fund (DHSCX) $16.82 15.27% 28.21% 50.18% 20.02% NA
Russell 2000 Index 14.52% 24.93% 47.25% 6.27%
Large Cap Fund (DHLAX) $10.34 15.36% 18.12% 31.92% NA NA
Russell 1000 Index 12.26% 15.63% 29.89%
Bank & Financial Fund (BANCX) $17.92 16.12% 23.15% 41.85% 25.04% 16.33%
S&P Supercomposite Financials/B/ 12.06% 17.09% 31.47% 0.89% 5.12%
NASDAQ Bank Index 12.49% 19.31% 33.04% 17.00% 12.17%
Short Term Fixed Income Fund (DHFAX) $10.01 0.59% 0.89% 2.04% NA NA
Merrill Lynch 1-3Yr Corp Govt Bond Index 0.26% 0.75% 2.74%
Strategic Income Fund (DSIAX) $11.58 4.78% 6.71% 20.67% NA NA
Merrill Lynch Domestic Master Index 0.28% 0.17% 4.12% 4.58%
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Since Inception
Fund Name Inception/A/ Date
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Focus Fund (DIAMX) 5.20% 6/30/00
Russell 3000 Index -5.03%
Small Cap Fund (DHSCX) 19.98% 12/29/00
Russell 2000 Index 6.25%
Large Cap Fund (DHLAX) 2.08% 6/29/01
Russell 1000 Index -1.67%
Bank & Financial Fund (BANCX) 14.63% 8/1/97
S&P Supercomposite Financials/B/ 6.72%
NASDAQ Bank Index 10.86%
Short Term Fixed Income Fund (DHFAX) 3.10% 6/28/02
Merrill Lynch 1-3Yr Corp Govt Bond Index 4.20%
Strategic Income Fund (DSIAX) 20.33% 9/30/02
Merrill Lynch Domestic Master Index
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Source: Diamond Hill Funds, Bloomberg LP and Frank Russell Company.
Returns are shown without sales charges but include all other expenses.
Standardized performance for each Fund is shown in each Fund's Management
Discussion of Fund Performance on page X through X.
/A/ Annualized if longer than one year. The Strategic Income Fund has been in
existance less than a year, thus its return since inception are not annualized.
/B/ Returns for the S&P Supercomposite Financials are price change only before
November 29,2001 and total return thereafter.
We are pleased with the past year on several fronts. After three years of
negative U.S. equity market returns, it is understandable that investors were
relieved by the positive returns in 2003. Of course, the desirability of this
depends in part on whether you are currently a saver or a spender. For those who
will be net savers over the coming years, continued declines in equity prices,
allowing for additional purchases at more attractive prices, may have been
welcomed. For spenders (sellers of equities), the good news of 2003 is
self-explanatory. In the best of all worlds, both the price and intrinsic value
of the companies we own will go up, while the price (but not necessarily the
intrinsic value) of everything else goes down. This allows the opportunity to
maintain an attractive portfolio (price significantly less than estimate of true
value) through active management. This best-of-all-worlds scenario will never
happen, and 2003 was no exception as stock prices increased nearly across the
board. Still, we are proud of the results in 2003 and will apply our same
investment philosophy and process in the future in an effort to achieve
satisfactory returns.
In the bond market, lower interest rates over the better part of the past four
years and narrowing credit spreads in the past five quarters have produced
substantial bond price appreciation. Yet, current low yields and narrower
spreads present difficult reinvestment options as interest is received and bond
issues mature. A long-term bond investor might welcome higher rates, willing to
suffer short-term pain in exchange for long-term gain. Of course, if rates
increase in lock-step with higher inflation, even the long term bond investor
will be no better off as far as real return, and likely worse off depending on
the individual tax circumstances. In this environment, we are inclined to give
up some current yield to await opportunities to invest at more attractive yields
in the future.
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Diamond Hill Funds Annual Report December 31, 2003 Page 1
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A second cause for optimism is the growth of our Funds. For the Fund advisor,
the benefits of economies of scale are obvious. Asset growth leads to marginal
revenue without much necessary marginal cost. For Fund shareholders, the
potential benefit comes through lower expense ratios. While the mutual fund
industry's effectiveness in passing on the benefits of growth to its
shareholders is debatable, we believe it is important to recognize the trade-off
involved. Economies of scale achieved by spreading expenses over a larger asset
base are counterbalanced by the diseconomies of scale the larger asset base has
on prospective performance. We are unlikely to strike a perfect balance.
Hopefully, our recognition of the issue and our emphasis on our fiduciary duties
give you confidence that we will heed Karl von Clauswitz's warning that "the
greatest enemy of a good plan is the dream of a perfect plan" and act
accordingly. We hope current shareholders prove to be "early adopters," and our
Funds experience continued growth. It is our intention that the benefits of this
growth are shared in a manner fitting the "mutual" fund moniker.
Equity Funds
Had we simply gone on vacation this past year (which we assure you was not the
case) and returned to find two facts: (1) the NASDAQ Composite appreciated 50%
and (2) our Funds were less than fully invested for some portion of the year, we
would have developed a sinking feeling and guessed our Funds had lagged market
averages considerably. Fortunately, however, this was not the case. While our
portfolios have a decided absence of investments in technology companies and
hold (in some cases significant) cash balances, returns exceeded appropriate
benchmarks in all cases except the long/short Focus Fund, a result we hope is
attributable to superior stock selection.
"It's not how much you make, but how much you make and keep" is an adage
intended to emphasize the importance of considering long-term over short-term
investment performance. At a minimum, we did a reasonable job preserving capital
in the bear market years of 2001 and 2002, so it was satisfying to also register
strong performance in an environment like 2003. Our results, we believe, are a
testament to the effectiveness of price sensitive investing. I want to reiterate
that the primary way we try to add value to your portfolio is through
fundamental analysis with adherence to the three principles of Benjamin Graham:
(1) owning a stock represents partial ownership in the entire business; (2) "Mr.
Market" is there to serve you; (3) always require a margin of safety.
Fixed Income Funds
In the fall of 2002, the excess yield (referred to as a spread) offered by
corporate bonds and preferred securities over Treasury securities was remarkably
wide. In our opinion, the rate of defaults implied by these spreads was
unjustifiably high and the portfolio was positioned to take advantage of this.
Credit spreads did indeed narrow considerably in the fourth quarter of 2002 and
all 2003. It is impossible to "prove" that credit-sensitive securities were
mispriced in the fall of 2002. Perhaps prices then properly reflected a scenario
that simply did not come to pass. Nevertheless, the economy and corporate
profits rebounded, and the Diamond Hill Strategic Income Fund profited
accordingly. Over time, our goal is to demonstrate an ability to appropriately
judge various risks, and to bear them when the compensation is reasonable or
better and minimize them otherwise.
Short-term interest rates remain extremely low as the Federal Reserve has
maintained its target rate at 1%, a level likely to produce no or maybe a
slightly negative real return. The primary objective of the Diamond Hill Short
Term Fixed Income Fund is preservation of capital and that continues to be our
focus in this low interest rate environment. While the effort to preserve
capital is never as exciting as the effort to grow it, sometimes circumstances
favor playing defensive and waiting to play offense, at full strength, another
day.
Thank you again for your trust in Diamond Hill Funds. As always, we will work
hard to continue to earn it. Best wishes for 2004.
/s/ Ric /s/ Chuck /s/ Kent
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R.H. Dillon, CFA Charles S. Bath, CFA Kent A. Rinker
Chief Investment Officer Managing Director - Equities Managing Director - Fixed Income
/s/ Chris /s/ Rick
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Christopher M. Bingaman, CFA Richard Moore, CFA
Investment Analyst- Equity Investment Analyst- Fixed Income
/s/ Tom /s/ Bill
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Thomas P. Schindler, CFA William Zox, CFA, J.D., LL.M.
Investment Analyst- Equity Investment Analyst- Fixed Income
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Page 2 Diamond Hill Funds Annual Report December 31,2003
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Market Timing
February 9,2004
Dear Fellow Shareholders:
In light of the ongoing investigations of mutual fund managers, I would like to
communicate the Diamond Hill Funds' views on a number of issues including market
timing, personal investing by fund managers, late trading and fair value
pricing. I will take this opportunity to discuss the policies and procedures
Diamond Hill has in place to help ensure that we put the interests of investors
first.
BACKGROUND
.. If you have not been following the recent events that are affecting the
mutual fund industry, several investment management firms, including
Putnam, Strong and Janus, are alleged to have permitted illegal or improper
trading in their funds by managers, investors and financial
representatives. In some instances, executives at these funds themselves
have engaged in improper "market timing" activities.
.. Market timing involves short-term "in-and-out" trading of fund shares that,
while not illegal, can increase the operating expenses of a fund and
dilute fund performance. Many funds have policies, stated in their
prospectuses, to stop or penalize market timing by investors.
Unfortunately, some fund companies did not enforce these policies, or
worse, allowed select investors to make market-timing trades without
penalty.
.. Market timing runs counter to the Diamond Hill investment philosophy. We
invest in companies, not in trends or momentum. We invest for the long
term, not for the short term. Therefore, we do not practice nor do we favor
any sort of market timing activity in mutual funds or in any other type of
investment.
PERSONAL INVESTING BY DIAMOND HILL MANAGERS
.. Diamond Hill's Mission Statement and Pledge can be found on page x of this
and previous shareholder reports. It states, in part "We will invest the
capital that you entrust to us with the same care that we invest our own
capital. To this end, Diamond Hill equity analysts and portfolio managers
will commit all of their investments in marketable equities (other than our
company stock) to the same portfolios in which our clients invest."
Likewise, I have committed all of my equity investments to our portfolios
and our company stock.
.. We do not ask non-investment staff to commit all of their investments to
our portfolios, however, as of December 31,2003, xx% of the Diamond Hill
401 (k) plan assets were invested in our funds and our company stock. I am
confident that market-timing trades have not occurred in the Diamond Hill
401 (k) plan because our plan only permits trades on a quarterly basis. For
a number of reasons we will move our plan to an improved 401 (k) system in
2004, which permits daily trading of funds; however, we will monitor
trading to be certain that no employee excessively trades the Diamond Hill
Funds.
.. Diamond Hill Code of Ethics. The Diamond Hill Funds and the Diamond Hill
Investment Advisors have adopted a code of ethics, which applies to all
employees, officers, directors, and trustees of the mutual funds and the
investment adviser. This code requires that all personal securities
transactions be conducted in a manner that avoids any actual or potential
conflicts of interest. I serve as Compliance Officer and, as a result, I am
personally responsible for ensuring compliance with the code - which
includes reviewing quarterly reporting of all trades and pre-approval of
certain trades.
.. We also report on compliance with the code to our Diamond Hill Fund
Trustees quarterly and annually. Everyone at Diamond Hill takes the Code of
Ethics seriously; however, the best way to avoid questionable or unethical
activity is to hire people with integrity. We will always strive to be
successful in this endeavor.
.. Currently, our code of ethics does not require pre-approval or reporting of
trades in Diamond Hill Funds. It is typical in the industry that
affiliated fund trades are exempt. Perhaps the industry naively assumed
that nothing inappropriate would happen. I think it is likely that in the
future all fund managers will be required to pre-approve trading in the
funds they manage. We discussed this issue at our Mutual Fund Trustee
meeting on November 20 and we anticipate future changes to our code of
ethics to address market timing.
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Diamond Hill Funds Annual Report December 31, 2003 Page 3
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MARKET TIMING POLICY
.. In the Diamond Hill Funds' prospectus, we state, "We reserve the right to
limit the amount of purchases and to refuse to sell to any person." Early
this year we considered the possibility of adding market timing
restrictions, redemption fees for frequent traders and similar measures to
our prospectus to actively discourage market timers. We discussed this with
our transfer agent and decided that we should not add these restrictions
because we were not experiencing ongoing problems with market timers and
the monitoring of the restrictions could be complex.
.. We will discuss this issue with our Trustees at our upcoming meeting and
expect that we will amend our prospectus in the future to restrict market
timing.
MARKET TIMING ACTIVITY
.. We monitor the trading activity in and out of our funds on a daily basis.
Over a four-week period in 2002 we noticed several large trades in and out
of the Diamond Hill Bank & Financial Fund. The trades were coming through a
national discount brokerage firm and were not prohibited by the
prospectus; however, we felt it was not in the best interests of
shareholders for such activity to continue.
.. We informed the brokerage firm of our concerns, and by following their
procedures we restricted this investor from investing in any of the Diamond
Hill Funds, both currently and in the future.
.. We will continue our efforts to identify and stop any trading activity that
is detrimental to the funds.
MARKET TIMING ARRANGEMENTS
.. We have no arrangements to permit any investor to make market-timing trades
in the Diamond Hill Funds, and we will not enter into any such arrangements
in the future.
LATE TRADING POLICIES
.. The Diamond Hill Funds have a typical policy regarding the processing of
mutual fund trades on a daily basis. Trades must be received in good order
by the funds' transfer agent by 4:00 p.m. to receive that day's price, or
the trade must be received, in good order and by 4:00 p.m., by a
third-party broker-dealer or processing organization with whom the funds
have a selling agreement.
.. We do not permit, and are not aware of any instance where we processed a
trade received after the deadline at the same day's price.
FAIR VALUE PRICING
.. We do not manage international or global funds. The securities in our
portfolios all trade in U.S. markets; there fore, the fair value pricing
issue does not affect our shareholders.
PROPOSALS FROM THE SEC
.. The Securities and Exchange Commission (SEC) is responsible for regulating
and monitoring mutual fund companies. Recently the SEC proposed a number of
changes including:
1. Requiring all mutual funds to adopt policies regarding market timing and
clearly disclose those policies in the prospectus.
2. We have a regular Board of Trustees meetings scheduled for February,
May,August and November 2004. At these meetings we always discuss our
current procedures and ways in which we can improve upon these procedures.
We will adopt new procedures as the SEC mandates them.
All of us at Diamond Hill appreciate the trust you have placed in us. I can
assure you that we are very aware of our responsibility to continue to
demonstrate to you that we are deserving of that trust. We intend to communicate
any changes to our policies and procedures to you, so you may continue to be
informed about our efforts to address these issues.
If you have questions concerning this or any other matter, please call me
directly at 614-255-3353.
Sincerely,
James F. Laird
President
DIAMOND HILL FUND
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Page 4 Diamond Hill Funds Annual Report December 31, 2003
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Mission Statement, Pledge
and Fundamental Principles
The mission of Diamond Hill is to achieve superior investment performance and
provide exceptional service to our clients.
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 1930's 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 associate possesses the highest level
of character, business ethics and professionalism.
Our employees will enjoy a working environment that supports professional and
personal growth initiatives, thereby maximizing employee satisfaction while
enhancing the productivity of the firm and the experience of our clients.
We will invest the capital that you entrust to us with the same care that we
invest our own capital. To this end, Diamond Hill equity analysts and portfolio
managers will commit all of their investments in marketable equities (other than
Diamond Hill Investment Group, Inc. stock) to the same portfolios in which our
clients invest.
Our Fundamental Principles are as follows:
.. 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.
.. 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.
.. Over sufficiently long periods of time, five years and longer, the stock
market price tends to revert to intrinsic value.
.. 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.
.. 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.
.. In estimating intrinsic value, we attempt to adopt 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 difficult job.
.. 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.
.. 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.
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Diamond Hill Funds Annual Report December 31, 2003 Page 5
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Stock Market Outlook - Forecasting the Next Decade
"It is dangerous to apply to the future inductive arguments based on past
experience, unless one can distinguish the broad reasons why past experience was
what it was."--John Maynard Keynes
Applying Keynes statement to the S&P 500, the strong returns of the past are
likely to be replicated in the future only if similar conditions--most
importantly the starting valuation--exist. This is a key contingency. To
understand why the past unfolded as it did, historic stock returns must be
related to two economic building blocks, earnings (and the dividends paid from
earnings) and interest rates.
Before analyzing the current outlook for the S&P 500 (which comprises more than
80% of the total U.S. market capitalization), a few comments might lend context.
First, our forecast hasn't changed much over the past three and a half years. At
Diamond Hill's inception in May of 2000, we felt investors should expect no more
than a 5% annualized return for the decade 2000-2009. We thought it could easily
be lower, and in fact the S&P 500 must return 12.5% per annum in the years
2004-2009 in order for the decade's annualized return to reach 5%.Yet, our
primary message then was that while market capitalization weighted indices were
decidedly unattractive, plenty of investment opportunities existed outside
technology and very large capitalization companies.As the S&P 500 index
decreased, perhaps surprisingly,our updated forecasted return only improved
marginally. This either lends credence to our statement that we believed it
could easily be lower or simply an acknowledgment that we were too optimistic
(read wrong), even at 5%.
Because we are active managers, we don't necessarily care what the S&P 500 does,
so long as we like what we own and have some concept of what constitutes a
satisfactory return given a suitable time horizon. In other words, an outlook
for the S&P 500 only tangentially affects what we do. This mindset has served us
well in the past, and we believe it will in the future.Today, we still believe
the market cap weighted indices are unattractive. While it is more difficult to
find attractive opportunities, this remains our charge.While we hope we can
achieve real returns that exceed historic market averages over the coming
decade, our foremost concern is maintaining the margin of safety in your
portfolio.
One final note of clarification: annualized returns here refer to compound
average (geometric) rather than an arithmetic average.To illustrate the
difference, consider the simple example of a manager who returns positive 100%
in the first year and negative 50% in the second.The geometric average is 0% (If
you start with $100, it doubles to $200 in the first year, then declines to $100
in the second year, leaving you exactly where you started). The arithmetic
average is 25% (100% + -50% / 2 = 25%). As long as returns are volatile, the
arithmetic average will always exceed the geometric average. If someone guessing
the return for any single year wanted the prediction to reflect the "average",
then the arithmetic average is relevant. We hope you agree that for long-term
investors, as far as enhancing wealth is concerned, the compound return should
be the focal point.
The Macro Analysis
The total return of the S&P 500 can be expressed as the sum of the dividend
yield and growth, R = Dividend / Price + Growth. Long-term studies that have
decomposed the sources of return in U.S. stocks have found that of the historic
6.5 - 7 % annual real (inflation-adjusted) return, dividends have provided 4.2%,
expansion of the price-to-earnings (P/E) ratio 1.2%, and real earnings growth
1.5% (varying some depending on the study and time period).
Dividend Yields
The current S&P 500 dividend yield is just 1.5%, so it is apparent that "growth"
needs to carry a heavier load in the future to achieve similar returns. Some
market observers have pointed to low dividend yields as a cause for concern in
the past. In fact, stocks at one time in our country's history yielded more than
bonds.This situation, at the time, was viewed as a perfectly natural state of
affairs. Since stocks were riskier than bonds, why shouldn't they yield more?
When the yield on stocks dropped below that of bonds, warnings arose.This
"market call" has been wrong for about the last 50 years (or perhaps it was just
too early; some might argue it will prove correct "in the fullness of time"!).
Both dividend yields and the payout ratio, the percentage of earnings paid out
as dividends, have been declining for some time and stocks have managed just
fine.The reason frequently professed for the handsome returns stocks have earned
over bonds, the so-called equity risk premium puzzle, is that stocks had been
undervalued historically, because there was either a lack of understanding or
skepticism of the "growth component" of stocks. As growth ensued, not only did
equity investors get a boost from growing real dividends paid out of growing
real earnings, but also an increase in the amount the market was willing to pay
through expanding multiples.
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Page 6 Diamond Hill Funds Annual Report December 31, 2003
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Not only did strong returns allow investors to "see it with their own eyes,"
theoretical support was lent by Nobel Prize winners Modigliani and Miller who
proposed that, all else equal, dividend policy is irrelevant. A corporation
paying a dividend to its owners is akin to the owners moving money from their
right pocket to their left, they argued. Furthermore, corporations contended it
was more tax efficient to return capital to owners through stock repurchases,
because dividends were taxed at marginal ordinary income rates, which frequently
exceeded the long-term capital gain rate. We are not in the camp that worries
excessively about low dividend yields, taking a cue from Phil Fisher who
entitled a chapter "The Hullabaloo about Dividends" in Common Stocks and
Uncommon Profits. In our evaluation of individual companies, the ability to pay
dividends is often more important than whether the company actually pays the
dividends. When the company retains the earnings, it places an additional burden
on us to ascertain whether the company is reinvesting wisely. At any rate, the
tax disincentive to paying dividends has been greatly reduced (for now), so we
may see the dividend payout ratio on the rise. If stock prices don't accelerate
faster than dividends, yields will rise as well. Still, we believe the
expectation for the dividend yield component of return is best estimated as the
current yield. Bottom Line: Dividend Yield of 1.5%.
Earnings Growth
Can growth pick up the slack? At first blush, it seems reasonable. A calculation
for a company's growth rate is its return on equity multiplied by the earnings
retention rate (1- payout ratio). The return on equity reported by corporate
America has been high in recent years (at least based on operating earnings),
and earnings retention has increased. Both factors would seemingly point to
future growth in excess of historic norms. Yet, a recent study by Robert Arnott
and Clifford Asness published in the Financial Analyst Journal (2003) found that
the historical empirical evidence refutes this, finding that expected earnings
growth is fastest when current payout ratios are high and slowest when low.
Perhaps there is some time dependent factor or alternative explanation for this
finding. One might think growth will be faster in the future, and that might
prove correct. Historic precedent, however, will not be the reason.
Can we at least get faster earnings growth from share repurchases? Again, the
historical empirical evidence does little to bolster the case. The relevant
factor under consideration is net share issuance, and studies have found that
share repurchases have not even offset the dilution from new shares issued
through initial public offerings, secondary offerings, debt convertible into
equity, and options. In summary, while U.S real GDP growth has been remarkable
in the past century, real corporate profit growth is the concern of stock
investors. While it may be initially tempting to believe that corporate profits
can grow faster than GDP, available evidence is to the contrary. Bottom Line:
Real Earnings Growth of 2.0%.
P/E Expansion
How about P/E expansion? There has been much debate about the "correct" earnings
of the S&P 500. For the sake of argument, let's agree that the current P/E ratio
on forward year earnings is 20. When interest rates are low, a higher P/E ratio
is justifiable. This argument can be taken too far, however. At a minimum,
stocks should require a higher return than long-term investment grade corporate
bonds. After all, bonds hold a legal claim to company assets that is senior to
the equity. While the cost of debt is explicit and the cost of equity is
"unseen" (both in an accounting sense and, unfortunately in the eyes of many
corporate managements), how could it make sense to be otherwise? Arguments that
rely strictly on a historic record can fall into circular reasoning, whereby the
better stocks do, the "cheaper" the cost of equity capital. Once the constraint
of a required return for equity in excess of the yield on corporate bonds is
introduced, arguments for still higher P/E multiples are difficult to justify.
If inflation remains near 2% or trends lower, the current P/E ratio may be in a
justifiable range. However, in our opinion, there is as reasonable chance that
inflation could move closer to the 1926-2003 geometric average of 3%. In this
scenario, P/E contraction is more likely. For a graphical representation of the
historic experience relating beginning P/E ratios with subsequent real returns,
we have borrowed a chart from Robert Shiller's book Irrational Exuberance
(updated with data available on his website for returns through 2003). The chart
illustrates the point made in the opening of this article: stocks can only be
expected to achieve returns similar to the past if the starting valuation is
similar. Bottom Line: Return from P/E expansion of 0%.
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2003 Page 7
What Historical P/E Ratios Tell Us
Historical data collected over the last 1O0 years tell us that when P/E ratios
fall within the current range of 20-25, annualized real returns over the next 10
years have been at the low end of the historical scale.
[Chart Representing Historical P/E
Ratios for January each year
1871 - 1993]
- --------------------------------------------------------------------------------
Page 8 Diamond Hill Funds Annual Report December 31, 2003
- --------------------------------------------------------------------------------
The Bottom Line
To summarize, a 1.5% yield and 2% real growth would provide a real return of
3.5%. Include an inflation estimate of 2.5%, and the nominal return would be 6%.
In our opinion, that is not enough compensation for equity investors (even
allowing that the equity risk premium in the past was abnormally high) and thus,
the S&P 500 is overvalued. If the market is overvalued, does that mean it will
go down in 2004? Surprisingly, that is nearly impossible to predict. The
following table illustrates why.
Year Scenario 1 Scenario 2
- ---------- ---------- ----------
2004 6% -17.5%
2005 6% 9%
2006 6% 9%
2007 6% 9%
2008 6% 9%
2009 6% 9%
2010 6% 9%
2011 6% 9%
2012 6% 9%
2013 6% 9%
Annualized
Return 6.00% 6.01%
Notice that each scenario ends with the same annualized return. While we believe
6% is a reasonable estimate for the return of the S&P 500 in the coming decade,
it is a safe bet the interim will contain up and down years. We have no idea,
however, of the sequence in which these might occur.
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Reports December 31, 2003 Page 9
- --------------------------------------------------------------------------------
Diamond Hill Focus Fund
================================================================================
Performance Update
- --------------------------------------------------------------------------------
Results (Class A) Since Inception*
Since
Year 6/30/00
Ended 12/31/03 Inception
- ------------------------------------------------------------
Diamond Hill Focus Fund (DIAMX) 22.91% 5.20%
- ------------------------------------------------------------
Russell 3000 Index 31.06% -5.03%
- ------------------------------------------------------------
* Returns shown are total returns. 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] [PHOTO]
R.H. Dillon, CFA Charles S. Bath, CFA
Co-Portfolio Manager Co-Portfolio Manager
We have two long-term goals for all our Funds: (1) provide absolute returns that
will allow shareholders to achieve their personal financial objectives; (2) add
value over an appropriate index. For the Focus Fund, 2003 was certainly a
successful year in regards to the first, and while the return trailed the index,
we are pleased with the performance given the portfolio's simultaneous
long/short positions. Over the long term, we expect to make money on both the
long and short side. However, in a year like 2003 when markets returns are so
positive, short positions make it difficult for the overall portfolio to
outperform the index. Over the long-term, we believe our short positions should
reduce portfolio volatility and aid returns in poor markets.
PacifiCare continues to be our largest investment position. Despite substantial
appreciation, we still believe it remains attractive. As many of you are
probably aware, the cost of health insurance coverage has been skyrocketing. The
important consideration for PacifiCare's earnings is the spread between the
premium revenue/service fees it receives and the costs it must pay to the health
care providers in its network and for company overhead. Industry fundamentals
have improved markedly in the past few years.The leverage, both operating and
financial, inherent in the company's business model has been apparent as the
company has recovered from an operating loss two years ago to expected earnings
in excess of $6 per share, valuing the company at less than 11 X earnings.
PacifiCare covers both private company employees and Medicare participants in a
program called Medicare+Choice. We believe recently passed Medicare legislation
will accrue to the benefit of PacifiCare on this business.
We also have large holdings in the energy sector. ConocoPhillips and Cimarex
Energy are compelling values due to the market's skepticism regarding energy
prices. Contrary to many forecasts, energy prices have not declined since the
end of the Iraq war. With energy prices at current levels, the companies are
very profitable, supporting much higher valuations.
Our short positions are primarily in the technology, consumer products and
retail sectors. We find the technology sector particularly overvalued, and thus
an attractive source of short opportunities. In the near term, these stocks have
only gotten more expensive, which is always a risk in short selling. While being
short technology in 2003 was painful, we were pleased the strength of our long
positions was sufficient to provide strong performance for the Focus Fund.
Thank you for your support. We look forward to working with you in the years
ahead.
/s/ Ric /s/ Chuck
- --------------------------------- ----------------------------------
R. H. Dillon, CFA Charles S. Bath, CFA
Portfolio Manager Portfolio Manager
- --------------------------------------------------------------------------------
Page 10 Diamond Hill Funds Annual Report December 31, 2003
================================================================================
Growth of $10,000
- --------------------------------------------------------------------------------
Comparison of the Change in Value of a $10,000 Investment in the Diamond Hill
Focus - Class A/(A)/ and the Russell 3000 Index
[CHART]
Focus Fund Class A Wilshire 5000 Index Russell 3000 Index
------------------ ------------------- ------------------
6/30/2000 9425 10000 10000
9189 9796 9823
9576 10507 10552
9774 10017 10074
9416 9804 9931
8925 8829 9015
9635 8986 9167
10653 9330 9480
10785 8445 8614
10295 7877 8052
11209 8525 8698
11398 8611 8767
11530 8466 8606
8522 7120 7262
10224 8001 8116
11278 8077 8195
10339 7059 7122
8499 5872 5895
9160 6331 6368
8480 6136 6174
10128 7149 7177
10195 7413 7423
12/31/2003 11259 8335 8345
Diamond Hill Focus Fund - Class A
Average Annual Total Returns /(B)/
One Year Since Inception/(C)/
15.88% 3.44%
/(A)/ The chart above represents the performance of Class A shares only, which
will vary from the performance of Class C shares based on the difference
in charges and fees paid by shareholders in the different classes.
/(B)/ The average annual total returns shown above are adjusted for maximum
applicable sales charge of 5.75%.
/(C)/ Class A and Class C shares commenced operations on June 30, 2000 and
February 13, 2001, respectively.
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.
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2003 Page 11
- --------------------------------------------------------------------------------
Diamond Hill Small Cap Fund
================================================================================
Performance Update
- --------------------------------------------------------------------------------
Results (Class A) Since Inception*
Since
Year 12/29/00
Ended 12/31/03 Inception
- -----------------------------------------------------------------
Diamond Hill Small Cap Fund (DHSCX) 50.18% 19.98%
- -----------------------------------------------------------------
Russell 2000 Index 47.25% 6.25%
- -----------------------------------------------------------------
* Returns shown are total returns. 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] [PHOTO]
R.H. Dillon, CFA Thomas P. Schindler
Co-Portfolio Manager Co-Portfolio Manager
This marks the third consecutive year the smaller capitalization Russell 2000
has outperformed the larger capitalization S&P 500.This comes as no surprise to
us. If asked to identify a few themes represented in our portfolios, one of them
would assuredly have been our belief that small cap would outperform large cap.
We believe this can continue, but much of the valuation gap that persisted in
the past few years has closed.
Ordinarily, we would devote a few sentences highlighting individual stocks that
contributed positively or negatively in the six months since our last report.
Perhaps the most striking observation is that everything still in the portfolio
at year-end had appreciated from either its June 30, 2003 price or in the case
of new positions, our cost. This reflects the very positive environment, as
market sentiment dominated any other factor in the second half of the year. Of
the stocks sold during the second half of the year, only Danielson Holding Corp.
and Interland (both sold in October primarily in an effort to offset taxable
gains) were sold below mid-year prices.
During the second half of the year, we bought several energy related companies.
In addition to adding to our existing position in Cimarex, we bought shares in
Southwestern Energy and Lufkin Industries, an oil service company.The oil and
gas industry is earning solid profits, and we believe industry fundamentals
should allow this to continue.
In our 2002 Semi-Annual Report, we mentioned our belief that merger activity
would eventually pick up and serve as a possible source of returns for the Fund.
In the second half of 2003, there was finally some evidence to support that
contention. Gaylord Entertainment acquired ResortQuest International, once the
Fund's largest holding, in a stock transaction closed in November. Summit
America announced that it will sell to E.W Scripps (who had previously acquired
70% of the Shop At Home network) for $4.15 per share in cash. Hanmi Financial
announced that it would acquire Fund holding Pacific Union Bancorp in a part
cash, part stock deal. We will seldom purchase an interest in a company on the
expectation it will be acquired in the near future, though in some cases we may
feel there is a potential logical buyer. Still, we expect that corporate buyers
will recognize the same value that we see in some of our investees, and that
over time merger and acquisition activity will provide one source for realizing
returns.
Thank you again for your interest in the Diamond Hill Small Cap Fund.
/s/ Ric /s/ Tom
- ------------------------------ ----------------------------------
R. H. Dillon, CFA Thomas P. Schindler, CFA
Portfolio Manager Portfolio Manager
- --------------------------------------------------------------------------------
Page 12 Diamond Hill Funds Annual Report December 31, 2003
================================================================================
Growth of $10,000
- --------------------------------------------------------------------------------
Comparison of the Change in Value of a $10,000 Investment in the Diamond Hill
Small Cap - Class A/(A)/ and the Russell 2000 Index
[CHART]
Small Cap Fund Class A Russell 2000 Index Wilshire 4500 Index
---------------------- ------------------ -------------------
12/29/2000 9425 10000 10000
10613 10521 10544
10613 9831 9263
10217 9350 8413
11329 10081 9303
11706 10329 9523
12111 10686 9600
11800 10108 9154
11480 9781 8709
9350 8465 7589
10283 8960 7987
11385 9653 8607
11822 10249 9069
13169 10657 9231
12438 9767 8327
10071 7677 7051
10849 8150 7454
9876 7784 7212
11977 9607 8759
14134 10478 9433
12/31/2003 16293 12000 10721
Diamond Hill Small Cap Fund - Class A
Average Annual Total Return /(B)/
One Year Since Inception/(C)/
41.51% 17.64%
/(A)/ The chart above represents the performance of Class A shares only, which
will vary from the performance of Class C shares based on the difference
in charges and fees paid by shareholders in the different classes.
/(B)/ The average annual total returns shown above are adjusted for maximum
applicable sales charge of 5.75%.
/(C)/ Class A and Class C shares commenced operations on December 29,2000 and
February 20,2001, respectively.
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.
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2003 Page 13
================================================================================
Diamond Hill Large Cap Fund
================================================================================
Performance Update
- --------------------------------------------------------------------------------
Results (Class A) Since Inception*
Since
Year 12/31/03
Ended 6/29/01 Inception
- -------------------------------------------------------------------
Diamond Hill Large Cap Fund (DHLAX) 31.92% 2.08%
- -------------------------------------------------------------------
Russell 1000 Index 29.89% -1.67%
- -------------------------------------------------------------------
* Returns shown are total returns.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 2003, my first complete year managing the
Diamond Hill Large Cap Fund. The fund's return of 31.9% exceeded its comparable
index. While the market rally starting in the fourth quarter of 2002 has been
stronger than I would have expected, it is nevertheless satisfying to outperform
in a robust market when we still spend time thinking about the potential
downside.
As 2003 began, I felt the best opportunities in the Russell 1000 were
concentrated in the smaller capitalization segment of that universe. At the
close of the year, I still believe this is the case even as small cap stocks
have outperformed significantly. An example of this is PacifiCare, a large
managed-care company first purchased early in 2003 and currently the largest
position in the portfolio. PacifiCare has shown a significant improvement in
profitability, a recovery I believe will continue for several years. Despite
substantial price appreciation, the valuation is still compelling as growth
opportunities remain.
I mentioned in last year's shareholders letter that I was finding few compelling
opportunities in the pharmaceutical sector. That continues to be the case
generally, but declining prices enabled the purchase of Pfizer and Johnson &
Johnson in 2003 at attractive valuations. These high quality companies are
rarely "cheap," and I believe they are sufficiently undervalued to add them to
the portfolio. The pharmaceutical sector remains a relatively small portion of
the portfolio, but I will continue to look for opportunities to add to our
holdings if valuations become more attractive.
I continued to increase our stakes in several energy companies this year. In my
opinion, the stock prices of many energy-related companies imply that not only
is it unlikely that commodity energy prices will remain at current levels, but
actually decline. Devon Energy and ConocoPhillips are two examples of this.
While a decline in oil and gas prices is certainly possible (but not the most
probable scenario in my opinion), the stocks appear to already discount this,
adding a margin of safety.
We continue to avoid many technology companies due to our valuation concerns.
While these stocks certainly performed well in 2003, we will not chase strong
returns. Instead, we continue to compare market price with our independent
appraisal of business value to find investment opportunities. While the absence
of some technology companies made for tougher relative comparisons, the
portfolio performed well even without significant investment in this sector. We
provide value to shareholders by applying our valuation discipline over the
course of a variety of market cycles. Over time, we believe this will allow us
to outperform the indices and our peers.
I want to conclude by thanking my fellow shareholders for their support. I look
forward to working with you in the years to come.
/s/ Chuck
- ----------------------------
Charles S. Bath, CFA
Managing Director - Equities
and Portfolio Manager
- --------------------------------------------------------------------------------
Page 14 Diamond Hill Funds Annual Report December 31, 2003
Growth of $10,000
Comparison of the Change in Value of a $10,000 Investment in the Diamond Hill
Large Cap - Class A/(A)/ and the Russell 1000 Index
[CHART]
Large Cap Class A Russell 1000 Index
----------------- -----------------
6/29/2001 9425 10000
9378 9863
9312 9262
8445 8477
8709 8653
9312 9320
9490 9419
9273 9300
9490 9114
9820 9488
9273 8945
9141 8866
8424 8212
6933 6823
7522 7380
7169 7163
7918 8290
8602 8539
12/31/2003 9923 9586
Diamond Hill Large Cap Fund - Class A
Average Annual Total Return/(B)/
One Year Since Inception/(C)/
24.34% (0.31%)
/(A)/ The chart above represents the performance of Class A shares only, which
will vary from the performance of Class C shares based on the difference
in charges and fees paid by shareholders in the different classes.
/(B)/ The average annual total returns shown above are adjusted for maximum
applicable sales charge of 5.75%.
/(C)/ Class A and Class C shares commenced operations on June 29,2001 and
September 25,2001, respectively.
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.
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31,2003 Page 15
================================================================================
Diamond Hill Bank & Financial Fund
================================================================================
Performance Update
- --------------------------------------------------------------------------------
Results (Class A) Since Inception*
Since
Year 8/1/97
Ended 12/31/03 Inception
- -----------------------------------------------------------------------
Diamond Hill Bank & Financial Fund (BANCX) 41.85% 14.63%
- -----------------------------------------------------------------------
S&P Supercomposite 1500 Financial Index 31.47% 6.72%
- -----------------------------------------------------------------------
NASDAQ Bank Index 33.04% 10.86%
- -----------------------------------------------------------------------
* Returns shown are total returns.The Fund return excludes any sales charges
but includes all other expenses. Standardized returns are disclosed on the
following page. Results longer than one year are annualized.
================================================================================
Portfolio Commentary
- --------------------------------------------------------------------------------
[PHOTO]
Christopher M.Bingaman, CFA
Portfolio Manager
Thank you for your interest in the Diamond Hill Bank & Financial Fund.
After a rather tentative start, 2003
witnessed very strong price appreciation for the Diamond Hill Bank & Financial
Fund as well as the overall U.S. stock market. Once again banks and financial
services companies performed better than the overall domestic market. As they
did in the prior three years, small banks and thrifts once again outperformed
the broader markets, albeit by a much narrower margin in 2003. While we are
quite pleased with the Funds' performance over the past few years, we are quite
certain that these levels of absolute performance are not sustainable. We also
believe the out-performance of the financial sector over the past four years has
now largely run its course (correcting very severe underperformance from late
1998 through March, 2000). In other words, we are now poised for financial
sector returns which we believe will be more in-line with the returns of the
overall market indices. We continue to expect the performance of the Bank &
Financial Fund to be superior to the overall financial sector (over sufficiently
long time periods) and we are hopeful the Fund will provide shareholders with
acceptable results on an absolute basis.
As in past years, the Fund benefited greatly from the performance of many small
banks and thrifts. However, the Fund also enjoyed stellar returns from
investments in many larger capitalization companies that were added to fund late
in 2002 and during the first quarter of 2003. Many companies became quite
attractive during these time periods and we took the opportunity to add
substantial investments in many companies that are more exposed to relatively
higher risk lending activities as well as the overall capital markets. Thus far,
these investments have appreciated significantly from initial cost. 2003 also
witnessed a pick up in merger and acquisition activity within the sector and we
clearly enjoyed the benefits of the increased level of activity (both in terms
of holdings being purchased at premiums as well as a general increase in the
share prices of many financial services institutions that are perceived to be
consolidation candidates...i.e., the public markets assigning a higher
probability that some our investments will realize their private market values
via acquisition).
More specifically, three holdings were purchased at substantial premiums by
larger institutions during 2003. First Essex Bancorp (FESX) announced an
agreement with Sovereign Bancorp (SOV) in the second quarter, while CCBT
Financial (CCBT) and Pacific Union Bank (PUBB) both announced transactions in
the fourth quarter. CCBT is merging into Banknorth Group (BNK) while Pacific
Union is joining forces with another southern California based Korean-American
bank, Hanmi Financial (HAFC). All three of these investments contributed nicely
to the Funds' performance during the year, especially PUBB which appreciated in
excess of 100% during 2003. In addition, two other holdings that were big
contributors to the overall performance of the fund were US Bancorp (USB) and
Countrywide Financial Corp (CFC). US Bancorp is a large cap super regional
banking company headquartered in Minneapolis, MN. The stock provided a total
return in excess of 45% for the year as the market became less concerned with
merger integration issues and began to focus on the positive fundamentals at
this high quality banking company. In similar fashion to 2002, Countrywide
Financial (CFC) was again a large positive contributor to the Fund's 2003
performance. The stock nearly doubled during the year as the company performed
very well within an industry (mortgage banking) that also experienced a
record-breaking year. Countrywide continues to take market share in from its
competitors and has used the mortgage origination boom to greatly expand its
mortgage servicing business as well as to rapidly grow its newly formed banking
subsidiary.
- --------------------------------------------------------------------------------
Page 16 Diamond Hill Funds Annual Report December 31, 2003
================================================================================
Growth of $10,000
- --------------------------------------------------------------------------------
Comparison of the Change in Value of a $10,000 Investment in the Diamond Hill
Bank & Financial - Class A/(A)/, the S&P 1500 Supercomposite Financial Index and
the NASDAQ Bank Index
[CHART]
Bank & Financial S&P 1500 Supercomposite Nasdaq Bank
Fund Class A Financial Index Index
---------------- ----------------------- -----------
8/1/1997 9425 10000 10000
9387 9318 9952
10254 10082 11014
10509 9869 11205
10754 10241 11342
11687 10831 12170
11546 10477 11722
12017 11427 12389
12705 12050 13002
13431 12241 13209
13468 11920 12902
13044 12357 12510
12865 12354 11956
10452 9512 9572
10452 9742 10238
10620 11828 10922
10490 12530 10452
11470 13138 11213
10870 11094 10161
10226 11940 10285
9249 12107 9374
8756 11684 9232
10115 14399 11041
11574 14785 12110
11836 13303 11827
13577 14339 13304
14050 12488 13070
14342 13385 13629
15852 13909 15014
16687 12941 15524
15006 10784 14274
15952 11548 14568
15566 13655 14311
18375 12966 16243
19487 13549 17227
12/31/2003 22628 15183 19381
Diamond Hill Bank & Financial Fund - Class A
Average Annual Total Return/(B)/
One Year Five Year Since Inception/(C)/
33.71% 14.96% 13.57%
/(A)/ The chart above represents the performance of Class A shares only, which
will vary from the performance of Class C shares based on the difference
in charges and fees paid by shareholders in the different classes.
/(B)/ The average annual total returns shown above are adjusted for maximum
applicable sales charge of 5.75%.
/(C)/ Class A and Class C shares commenced operations on August 1, 1997 and June
3, 1999, respectively.
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.
================================================================================
Portfolio Commentary (continued)
- --------------------------------------------------------------------------------
In general, we have continued to reduce the concentration in the small cap banks
and thrifts as many of these companies are very dependent on lower return types
of spread based revenues. As we noted in last year's annual letter, these
companies have enjoyed solid margins and credit quality during the past few
years. With strong fundamentals in place and valuations that had not fully
corrected from the late 1990's under-performance, many of these companies
enjoyed strong price appreciation over the past few years but now appear to be
fully valued. Much of the proceeds from these sales have been redeployed into
mid and large cap companies which have businesses tied to commercial lending,
capital markets activities, assets management and property and casualty
insurance. These companies were pressured to a much larger extent by the soft
economic conditions of the past few years. While these investments have recently
appreciated, they represent a superior opportunity when compared to most small
cap banks and thrifts.
As in the past, we continue to believe shareholders in the fund will benefit
from a relatively concentrated portfolio. We will likely own between 25 and 35
stocks in the fund with an average position size of between 3% and 4%. Also, as
you may know, the Board of Trustees has provided the advisor with the ability to
take short positions in Fund. As it has recently become more difficult to find
investments that meet our expected return criteria, we may begin to deploy some
capital by shorting certain securities that we believe are trading at
substantial premiums to our estimate of intrinsic value. We do not intend to do
this as a 'hedge' to mitigate our long exposure, but instead as way to enhance
our performance over time. Finally, and most importantly, we will continue to be
vigilant in our assessment of the risk profiles, business outlooks and
valuations of our current and prospective investments.
/s/ Chris
- ---------------------------------------
Christopher M. Bingaman, CFA
Portfolio Manager
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2003 Page 17
================================================================================
Diamond Hill Short Term Fixed Income Fund
================================================================================
Performance Update
- --------------------------------------------------------------------------------
Results (Class A) Since Inception*
Since
Year 6/28/02
Ended 12/31/03 Inception
- -----------------------------------------------------------------------------------
Diamond Hill Short Term Fixed Income Fund (DHFAX) 2.04% 3.10%
- -----------------------------------------------------------------------------------
Merrill Lynch 1-3 Year Corporate/Government Bond Index 2.74% 4.20%
- -----------------------------------------------------------------------------------
* Returns shown are total returns.The Fund return excludes any sales charges
but includes all other expenses. Standardized returns are disclosed on the
following page. Results longer than one year are annualized.
================================================================================
Portfolio Commentary
- --------------------------------------------------------------------------------
[PHOTO]
Kent K.Rinker
Portfolio Manager
The Diamond Hill Short Term Fund generated a total rate of return of 2.04% for
the year 2003. This fund, with a duration of less than 2 years, invests in very
short term securities or mortgage-backed securities with a very short average
life. With federal funds at 1-1.50% for the balance of the year, it was
difficult to generate much yield for this fund. As a matter of fact, the 2-year
U.S.Treasury security yielded less than 2% for the entire year, and probably
averaged about 1.50%. This is relevant to our fund, since the duration for the
Short Term fund was less than 2 years throughout 2003.
As we discussed in our June 30 2003 report, the Federal Reserve has increasingly
been concerned about growth in our economy and whether or not our economy can
rebound from prior weakness and avoid deflation. In fact, it is clear that the
lending authorities are now willing to err on the side of inflation, by keeping
short term interest rates low for some time. We may be in this type of economic
environment for quite some time.
Indeed, during the past quarter, there have been increasing signs that the
economy has begun its recovery, with increased capital spending coming alongside
increased earnings. However, job growth has yet to materialize, and this is
needed before we will see short-term interest rates begin to rise.
Over the past six months, we have increased our exposure to the corporate
market, somewhat increasing the risk to the portfolio from a credit perspective.
These securities clearly carry more credit risk than U.S. Treasury securities.
However, we will only buy corporate credits with which we are comfortable.
Because of the short-term nature of these securities, we believe that these
purchases will generate some additional income for us, while, at the same time,
allowing us to preserve capital.
We thank you for your continued support of the Diamond Hill Short Term Fund.
/s/ Kent /s/ Rick /s/ Bill
- ----------------------- -------------------- -----------------------------
Kent Rinker Rick Moore, CFA William Zox, CFA, J.D., LL.M.
Portfolio Manager Investment Analyst Investment Analyst
- --------------------------------------------------------------------------------
Page 18 Diamond Hill Funds Annual Report December 31, 2003
================================================================================
Growth of $10,000
- --------------------------------------------------------------------------------
Comparison of the Change in Value of a $10,000 Investment in the Diamond Hill
Short Term Fixed Income - Class A/(A)/ and the Merrill Lynch 1-3 Year U.S.
Corporate & Government Index
[CHART]
Short Term Fixed Merrill Lynch 1-3 yr
Income Fund Class A US Corporate/Government Index
------------------- -----------------------------
6/28/2002 9725 10000
9805 10105
9893 10153
9894 10236
9878 10255
9906 10253
9977 10358
10057 10448
9816 10563
10122 10616
12/31/2003 10181 10643
Diamond Hill Short Term Fixed Income Fund - Class A
Average Annual Total Return/(B)/
One Year Since Inception/(C)/
(0.81%) 1.22%
/(A)/ The chart above represents the performance of Class A shares only, which
will vary from the performance of Class I shares based on the difference
in charges and fees paid by shareholders in the different classes.
/(B)/ The average annual total returns shown above are adjusted for maximum
applicable sales charge of 2.75%.
/(C)/ Class A and Class I shares commenced operations on June 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.
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2003 Page 19
================================================================================
Diamond Hill Strategic Income Fund
================================================================================
Performance Update
- --------------------------------------------------------------------------------
Results (Class A) Since Inception*
Since
Year 9/30/02
Ended 12/31/03 Inception
- -----------------------------------------------------------------------
Diamond Hill Strategic Income Fund (DSIAX) 20.67% 20.33%
- -----------------------------------------------------------------------
Merrill Lynch Domestic Master Index 4.12% 4.58%
- -----------------------------------------------------------------------
* Returns shown are total returns. 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
Investments in the fixed income markets in 2003 produced significantly varied
returns, depending upon the asset class. According to Lipper Inc., the 2003
average annual returns for selected fixed income funds ranged from 1.30% for
U.S. Government funds to 24.30% for high yield funds, with the average of eleven
different types of funds producing a return of 7.85%. Asset class selection was
key in producing the 20.7 % return in the Diamond Hill Strategic Income Fund. We
avoided U.S.Treasuries, mortgage-backed securities, asset backed securities and
the high quality corporate market. We maintained our focus in higher yielding
corporate bonds, preferred securities, and distribution growth vehicles such as
real estate investment trusts and master limited partnerships.
When we started this fund, our task was to create a fund that would generate a
relatively high rate of return, supported by strong underlying cash flows.
Fortunately, the economic environment has been ideal for that objective. For
quite awhile, the Federal Reserve has kept interest rates low, in an effort to
revive the economy. At the same time, corporations have become much healthier
from a cash flow perspective. This combination, coupled with an ever-increasing
demand for income from investors, created an ideal environment for last year's
structure of the Strategic Income Fund. It is not often that a fixed income fund
has the opportunity to create "equity type" returns, with far less risk. We took
advantage of the situation and were in the right place at the right time.
However, the days of very high returns in the fixed income markets are soon to
be over. High returns are normally generated in our markets in two ways. Either
interest rates decline sharply, creating capital gains on the underlying
securities, or we have last year's situation, where the interest rate spread
between riskier assets and U.S. Treasuries collapses. Neither of these scenarios
seems plausible for 2004. We are already at the low end, historically, for
interest rates, and there are reasons to believe that interest rates will
increase next year. So to, it would be impossible for credit spreads to narrow
as much as last year, since last year's narrowing was a record amount and the
current interest spread for various "spread products" is already becoming
somewhat unattractive. Our best bet is that we will see a year of flat to rising
interest rates, with interest rate spreads maintaining their current margin.
Hopefully, in this environment, our current portfolio of diversified assets,
with high cash flows, will continue to provide attractive returns. The economic
environment that we envision should be good for the current structure of our
portfolio. We have been able to grow the assets of the fund, during its first
year, and we thank you for your support.
/s/ Kent /s/ Rick /s/ Bill
- ------------------ -------------------- --------------------------------
Kent Rinker Rick Moore, CFA William Zox, CFA, J.D., LL.M.
Portfolio Manager Investment Analyst Investment Analyst
- --------------------------------------------------------------------------------
Page 20 Diamond Hill Funds Annual Report December 31, 2003
================================================================================
Growth of $10,000
- --------------------------------------------------------------------------------
Comparison of the Change in Value of a $10,000 Investment in the Diamond Hill
Strategic Income - Class A/(A)/ and the Merrill Lynch Domestic Master Index
[CHART]
Line Chart
Strategic Income Merrill Lynch
Fund Class A Domestic Master Index
---------------- ---------------------
9/30/2002 9525 10000
9543 9955
9780 9952
9952 10159
10419 10300
10721 10561
11462 10548
12/31/2003 12009 10578
Diamond Hill Strategic Income Fund - Class A
Average Annual Total Returns/(B)/
One Year Since Inception/(C)/
147.96% 15.73%
/(A)/ The chart above represents the performance of Class A shares only, which
will vary from the performance of Class C shares based on the difference
in charges and fees paid by shareholders in the different classes.
/(B)/ The total return shown above is adjusted for maximum applicable sales
charge of 4.75%.
/(C)/ Class A and Class C 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.
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2003 Page 21
Diamond Hill Focus Fund
Schedule of Investments
December 31, 2003
Shares Value
- --------------------------------------------------------------------------------
Common Stocks -- 78.7%
Consumer Discretionary -- 28.4%
American Greetings Corp.*+ 48,500 $ 1,060,695
Belo Corp.+ 25,000 708,500
Brunswick Corp. 28,000 891,240
CPI Corp. 30,700 620,447
Fortune Brands, Inc.+ 7,000 500,430
The Black & Decker Corp.+ 17,000 838,440
The Brink's Co. 29,825 674,343
ValueVision Media, Inc.* 33,000 551,100
Viad Corp. 24,000 600,000
- --------------------------------------------------------------------------------
6,445,195
- --------------------------------------------------------------------------------
Energy -- 10.5%
Apache Corp.+ 8,000 648,800
Cimarex Energy Co.* 40,000 1,067,600
ConocoPhillips+ 10,000 655,700
- --------------------------------------------------------------------------------
2,372,100
- --------------------------------------------------------------------------------
Financial -- 10.8%
Allstate Corp.+ 22,000 946,440
Danielson Holding Corp.* 90,157 262,357
U.S. Bancorp+ 20,600 613,468
Wells Fargo & Co. 10,500 618,345
- --------------------------------------------------------------------------------
2,440,610
- --------------------------------------------------------------------------------
Health Care -- 15.2%
Cardinal Health, Inc. 6,500 397,540
Johnson & Johnson+ 8,000 413,280
Merck & Co., Inc. 12,900 595,980
Pacificare Health Systems, Inc.* 30,000 2,028,000
- --------------------------------------------------------------------------------
3,434,800
- --------------------------------------------------------------------------------
Industrial -- 6.5%
Norfolk Southern Corp.* 28,000 662,200
Trinity Industries, Inc.+ 26,100 804,924
- --------------------------------------------------------------------------------
1,467,124
- --------------------------------------------------------------------------------
Materials -- 7.3%
MeadWestvaco Corp. 25,000 743,750
Weyerhaeuser Co. 14,000 896,000
- --------------------------------------------------------------------------------
1,639,750
================================================================================
Total Common Stocks $17,799,579
- --------------------------------------------------------------------------------
Cash Equivalents -- 7.0%
First American Prime Obligations
Fund - Class A 442,152 442,152
First American Treasury
Obligations Fund - Class A 1,125,480 1,125,480
================================================================================
Total Cash Equivalents $ 1,567,632
- --------------------------------------------------------------------------------
Registered Investment Companies -- 14.2%
Diamond Hill Short Term Fixed
Income Fund - Class I 321,802 $ 3,218,023
- --------------------------------------------------------------------------------
Par Value Value
- -------------------------------------------------------------------------------
Treasury Notes -- 6.9%
Treasury Inflationary Index,
1.88%, 7/15/13 $503,655 $ 500,035
U.S. Treasury Inflation Index,
3.00%, 7/15/12 514,480 560,863
U.S. Treasury Note, 3.63%, 3/31/04 500,000 503,242
===============================================================================
Total Treasury Notes $ 1,564,140
===============================================================================
Total Investment Securities -- 106.8%
(Amortized Cost $19,935,518) 24,149,374
Segregated Cash With Brokers -- 21.3% 4,818,772
Securities Sold Short -- (31.8%)
(Proceeds $5,544,947) (7,186,102)
Other Assets in Excess
of Liabilities -- 3.7% 841,414
- -------------------------------------------------------------------------------
Net Assets -- 100.0% $22,623,458
===============================================================================
* 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 $6,608,101.
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
Page 22 Diamond Hill Funds Annual Report December 31, 2003
Diamond Hill Focus Fund
Schedule of Securities Sold Short
December 31, 2003
Shares Value
- --------------------------------------------------------------------------------
Common Stocks -- 27.1%
Consumer Discretionary -- 7.3%
Amazon.com, Inc.* 12,000 $ 631,680
Harley-Davidson, Inc. 3,000 142,590
Kohl's Corp.* 11,500 516,810
Panera Bread Co.* 4,000 158,120
The Gap, Inc. 8,400 194,964
- --------------------------------------------------------------------------------
1,644,164
- --------------------------------------------------------------------------------
Consumer Staples -- 3.3%
Colgate-Palmolive Co. 7,000 350,350
Kraft Foods, Inc. 5,400 173,988
Pepsi Bottling Group, Inc. 9,500 229,710
- --------------------------------------------------------------------------------
754,048
- --------------------------------------------------------------------------------
Industrial -- 1.9%
General Electric Co. 4,000 123,920
United Parcel Service, Inc. 4,000 298,200
- --------------------------------------------------------------------------------
422,120
- --------------------------------------------------------------------------------
Information Technology -- 14.6%
Cisco Systems, Inc.* 24,000 582,960
Dell, Inc.* 7,000 237,720
EMC Corp.* 24,000 310,080
Foundry Networks, Inc.* 15,000 410,400
Intel Corp. 10,000 322,000
Juniper Networks, Inc.* 25,000 467,000
Lam Research Corp.* 7,400 239,020
National Semiconductor Corp.* 5,000 197,050
Sun Microsystems, Inc.* 20,000 89,800
Yahoo!, Inc.* 10,000 451,700
- --------------------------------------------------------------------------------
3,307,730
================================================================================
Total Common Stocks Sold Short
(Proceeds $4,653,079) $6,128,062
- --------------------------------------------------------------------------------
Exchange Traded Funds -- 4.7%
Conglomerates -- 2.0%
Nasdaq 100 Trust, Series I 12,000 437,040
- --------------------------------------------------------------------------------
Semiconductors -- 2.7%
Semiconductor HOLDRs Trust 15,000 621,000
================================================================================
Total Registered Investment Companies
(Proceeds $891,868) $1,058,040
================================================================================
Total Securities Sold Short
(Proceeds $5,544,947) $7,186,102
- --------------------------------------------------------------------------------
* Non-income producing security.
See accompanying notes to financial statements.
Diamond Hill Small Cap Fund
Schedule of Investments
December 31, 2003
Shares Value
- --------------------------------------------------------------------------------
Common Stocks -- 81.4%
Consumer Discretionary -- 30.0%
American Greetings Corp.* 38,400 $ 839,807
Belo Corp. 17,000 481,780
The Black & Decker Corp. 9,800 483,336
Brunswick Corp. 12,750 405,833
CPI Corp. 21,600 436,536
Lodgenet Entertainment Corp.* 37,012 676,579
Summit America Television, Inc.* 123,500 484,120
The Brink's Co. 25,000 565,250
United Auto Group, Inc. 15,800 494,540
ValueVision Media, Inc.* 19,000 317,300
Viad Corp. 23,000 575,000
- --------------------------------------------------------------------------------
5,760,081
- --------------------------------------------------------------------------------
Consumer Staples -- 2.1%
Del Monte Foods Co.* 25,000 260,000
Lancaster Colony Corp. 3,100 139,996
- --------------------------------------------------------------------------------
399,996
- --------------------------------------------------------------------------------
Energy -- 7.5%
Cimarex Energy Co.* 33,000 880,770
Lufkin Industries, Inc. 6,500 187,135
Southwestern Energy Co.* 15,300 365,670
- --------------------------------------------------------------------------------
1,433,575
- --------------------------------------------------------------------------------
Financial -- 9.5%
1st Source Corp. 20,936 450,333
ITLA Capital Corp.* 2,550 127,755
MAF Bancorp, Inc. 2,545 106,636
Merchants Bancshares, Inc. 2,500 76,375
Pacific Union Bank 27,829 710,474
Quaker City Bancorp, Inc. 7,250 337,488
- --------------------------------------------------------------------------------
1,809,061
- --------------------------------------------------------------------------------
Health Care -- 10.4%
Manor Care, Inc. 12,000 414,840
PacifiCare Health Systems, Inc.* 19,000 1,284,400
US Oncology, Inc.* 27,000 290,520
- --------------------------------------------------------------------------------
1,989,760
- --------------------------------------------------------------------------------
Industrial -- 11.5%
Kaydon Corp.* 10,400 268,736
Mair Holdings, Inc.* 34,400 250,432
The Greenbrier Companies, Inc. 54,000 904,500
Trinity Industries, Inc. 20,000 616,800
United Industrial Corp. 9,000 162,450
- --------------------------------------------------------------------------------
2,202,918
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2003 Page 23
Diamond Hill Small Cap Fund
Schedule of Investments
December 31, 2003 (Continued)
Shares Value
- ------------------------------------------------------------------------------
Information Technology -- 4.3%
Maxwell Technologies, Inc.* 32,400 $ 230,040
The TriZetto Group, Inc.* 90,500 583,725
- ------------------------------------------------------------------------------
813,765
- ------------------------------------------------------------------------------
Materials -- 6.1%
American Pacific Corp.* 19,500 187,200
Buckeye Technologies, Inc.* 78,000 783,900
Grief, Inc. - Class B 5,500 196,625
- ------------------------------------------------------------------------------
1,167,725
- ------------------------------------------------------------------------------
Total Common Stocks $15,576,881
- ------------------------------------------------------------------------------
Registered Investment Companies -- 5.3%
Diamond Hill Short Term Fixed Income Fund - Class I 101,111 $ 1,011,108
- ------------------------------------------------------------------------------
Cash Equivalents -- 3.7%
First American Treasury Obligations Fund - Class A 711,064 711,064
- ------------------------------------------------------------------------------
Par Value Value
- ------------------------------------------------------------------------------
U.S.Treasury Obligations -- 8.2%
Treasury Inflationary Index, 1.88%, 7/15/13 $ 503,655 $ 500,035
U.S.Treasury Inflation Index, 3.00%, 7/15/12 514,480 560,863
U.S.Treasury Note, 3.63%, 3/31/04 500,000 503,242
- ------------------------------------------------------------------------------
Total U.S.Treasury Obligations $1,518,135 $ 1,564,140
- ------------------------------------------------------------------------------
Total Investment Securities -- 98.6%
(Amortized Cost $13,742,578) $18,863,193
Other Assets In Excess Of Liabilities -- 1.4% 267,835
- ------------------------------------------------------------------------------
Net Assets -- 100.0% $19,131,028
- ------------------------------------------------------------------------------
* Non-income producing security.
See accompanying notes to financial statements.
Diamond Hill Large Cap Fund
Schedule of Investments
December 31, 2003
Shares Value
- -------------------------------------------------------------------------
Common Stocks -- 92.7%
Consumer Discretionary -- 20.5%
American Greetings Corp.* 15,100 $ 330,237
Belo Corp. 5,000 141,700
The Black & Decker Corp. 6,060 298,879
Brunswick Corp. 6,150 195,755
Fortune Brands, Inc. 3,200 228,768
The Brink's Co. 8,100 183,141
Viad Corp. 4,500 112,500
- -------------------------------------------------------------------------
1,490,980
- -------------------------------------------------------------------------
Consumer Staples -- 3.6%
Kimberly-Clark Corp. 3,800 224,542
Kroger Co.* 2,100 38,871
- -------------------------------------------------------------------------
263,413
- -------------------------------------------------------------------------
Energy -- 11.2%
Anadarko Petroleum Corp. 2,500 127,525
Apache Corp. 2,800 227,080
ConocoPhillips 3,700 242,609
Devon Energy Corp. 3,900 223,314
- -------------------------------------------------------------------------
820,528
- -------------------------------------------------------------------------
Financial -- 13.9%
Allstate Corp. 8,000 344,160
Comerica, Inc. 2,300 128,938
U.S. Bancorp 6,800 202,504
Wells Fargo & Co. 2,900 170,781
Westpac Banking Corp. - ADR 2,800 169,176
- -------------------------------------------------------------------------
1,015,559
- -------------------------------------------------------------------------
Health Care -- 14.3%
Cardinal Health, Inc. 2,000 122,320
Johnson & Johnson 3,000 154,980
Manor Care, Inc. 3,800 131,366
Merck & Co., Inc. 3,500 161,700
PacifiCare Health Systems, Inc.* 5,700 385,320
Pfizer, Inc. 2,400 84,792
- -------------------------------------------------------------------------
1,040,478
- -------------------------------------------------------------------------
Industrial -- 13.1%
Eaton Corp. 1,200 129,576
Masco Corp. 4,000 109,640
Norfolk Southern Corp. 9,000 212,850
Pall Corp. 5,350 143,541
Parker Hannifin Corp. 1,750 104,125
Trinity Industries, Inc. 8,400 259,056
- -------------------------------------------------------------------------
958,788
- -------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Page 24 Diamond Hill Funds Annual Report December 31, 2003
Diamond Hill Large Cap Fund
Schedule of Investments
December 31, 2003 (Continued)
Shares Value
- ---------------------------------------------------------------------------
Information Technology -- 1.4%
SunGard Data Systems, Inc.* 3,800 $ 105,298
- ---------------------------------------------------------------------------
Materials -- 10.5%
Bowater, Inc. 3,700 171,347
Ecolab, Inc. 3,000 82,110
MeadWestvaco Corp. 7,700 229,075
Weyerhaeuser Co. 4,500 288,000
- ---------------------------------------------------------------------------
770,532
- ---------------------------------------------------------------------------
Utilities -- 4.2%
American Electric Power Co., Inc. 4,500 137,295
Dominion Resources, Inc. 1,400 89,362
Duke Energy Corp. 4,000 81,800
- ---------------------------------------------------------------------------
308,457
- ---------------------------------------------------------------------------
Total Common Stocks $6,774,033
- ---------------------------------------------------------------------------
Cash Equivalents -- 4.0%
First American Treasury Obligations Fund - Class A 292,386 292,386
- ---------------------------------------------------------------------------
Par Value Value
- ---------------------------------------------------------------------------
U.S.Treasury Obligations -- 3.1%
U.S.Treasury Inflation Index, 3.00%, 7/15/12 $205,792 $ 224,345
- ---------------------------------------------------------------------------
Total Investment Securities -- 99.8%
(Amortized Cost $5,826,838) $7,290,764
Other Assets In Excess Of Liabilities -- 0.2% 17,400
- ---------------------------------------------------------------------------
Net Assets -- 100.0% $7,308,164
- ---------------------------------------------------------------------------
* Non-income producing security.
ADR - American Depository Receipt
See accompanying notes to financial statements.
Diamond Hill Bank & Financial Fund
Schedule of Investments
December 31, 2003
Shares Value
- -------------------------------------------------------------------------
Common Stocks -- 79.5%
Consumer Finance -- 3.2%
Countrywide Financial Corp. 6,000 $ 455,100
- -------------------------------------------------------------------------
Finance - Banks & Thrifts -- 61.6%
Ist Source Corp. 21,500 462,465
Bank of America Corp. 5,000 402,150
Capital Corp. of the West* 7,693 304,951
CCBT Financial Companies, Inc. 8,600 300,570
Charter One Financial, Inc. 8,175 282,446
Citigroup, Inc. 10,200 495,108
Comerica, Inc. 5,000 280,300
Corus Bankshares, Inc. 14,000 441,840
First Essex Bancorp, Inc. 6,707 389,945
First National Lincoln Corp. 1,300 64,867
First Republic Bank 5,000 179,000
First State Bancorp 13,100 455,225
Greater Bay Bancorp 7,000 199,360
ITLA Capital Corp.* 8,702 435,970
MAF Bancorp, Inc. 8,189 343,119
Merchants Bancshares, Inc. 2,500 76,375
National City Corp. 14,000 475,160
Pacific Union Bank 34,328 876,395
PNC Financial Services Group 7,000 383,110
Quaker City Bancorp, Inc. 7,002 325,943
South Trust Corp. 5,000 163,650
U.S. Bancorp 21,600 643,248
Wells Fargo & Co. 10,400 612,456
Westpac Banking Corp. - ADR 5,000 302,100
- -------------------------------------------------------------------------
8,895,753
- -------------------------------------------------------------------------
Financial - Diversified -- 7.2%
Federal Home Loan Mortgage Corp. 7,000 408,240
Mellon Financial Corp. 12,000 385,320
Merrill Lynch & Co., Inc. 4,300 252,195
- -------------------------------------------------------------------------
1,045,755
- -------------------------------------------------------------------------
Insurance -- 7.5%
Allstate Corp. 17,000 731,340
SAFECO Corp. 9,000 350,371
- -------------------------------------------------------------------------
1,081,711
- -------------------------------------------------------------------------
Total Common Stocks $11,478,319
- -------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2003 Page 25
Diamond Hill Bank & Financial Fund
Schedule of Investments
December 31,2003 (Continued)
Shares Value
- ---------------------------------------------------------------
Registered Investment Companies -- 4.2%
Diamond Hill Short Term Fixed
Income Fund - Class I 60,455 $ 604,550
- ---------------------------------------------------------------
Cash Equivalents -- 10.0%
First American Prime Obligations
Fund - Class A 721,539 721,539
First American Treasury Obligations
Fund - Class A 721,539 721,539
- ---------------------------------------------------------------
Total Cash Equivalents $ 1,443,078
- ---------------------------------------------------------------
Total Investment Securities -- 93.7%
(Amortized Cost $10,049,673) $13,525,947
Other Assets In Excess
Of Liabilities -- 6.3% 910,778
- ---------------------------------------------------------------
Net Assets -- 100.0% $14,436,725
- ---------------------------------------------------------------
* Non-income producing security.
ADR - American Depository Receipt
See accompanying notes to financial statements.
Diamond Hill Short Term Fixed Income Fund
Schedule of Investments
December 31,2003
Shares Value
- ----------------------------------------------------------------------------
Preferred Stock -- 7.5%
Finance -- 5.0%
AT&T Capital Corp., 8.25% 12,000 $299,760
- ----------------------------------------------------------------------------
Oil & Gas Services -- 2.5%
Oxy Capital Trust I,8.16% 6,000 150,480
- ----------------------------------------------------------------------------
Total Preferred Stock $450,240
- ----------------------------------------------------------------------------
Par Value Value
- ----------------------------------------------------------------------------
Corporate Bonds -- 39.2%
Consumer Cyclicals -- 8.3%
Ford Motor Co., 8.88%, 4/1/06 $160,000 $177,270
General American Transportation,
8.63%, 12/1/04 311,000 323,923
- ----------------------------------------------------------------------------
501,193
- ----------------------------------------------------------------------------
Consumer, Non-Cyclical -- 2.6%
Carnival Corp., 7.05%, 5/15/05 50,000 53,175
Royal Caribbean Cruises, 8.13%, 7/28/04 100,000 103,250
- ----------------------------------------------------------------------------
156,425
- ----------------------------------------------------------------------------
Finance -- 1.5%
General Motors Acceptance Corp.,
7.50%, 7/15/05 48,000 51,586
Provident Bank, 6.38%, 1/15/04 40,000 40,054
- ----------------------------------------------------------------------------
91,640
- ----------------------------------------------------------------------------
Industrial -- 6.7%
American Standard, Inc., 7.38%, 4/15/05 45,000 47,475
Crane Co., 8.50%, 3/15/04 100,000 101,352
Fort James Corp., 6.63%, 9/15/04 75,000 76,500
Fort James Corp., 6.88%, 9/15/07 70,000 73,850
Kaufman & Broad Home Corp.,
7.75%, 10/15/04 50,000 51,250
Waste Management, Inc., 7.00%, 5/15/05 52,000 55,138
- ----------------------------------------------------------------------------
405,565
- ----------------------------------------------------------------------------
Manufacturing -- 1.7%
Tyco International Group SA,
5.88%, 11/1/04 100,000 102,750
- ----------------------------------------------------------------------------
Retail-- 1.7%
Penney (J.C.) Co., Inc., 6.00%, 5/1/06 100,000 101,000
- ----------------------------------------------------------------------------
Technology -- 7.6%
Electronic Data Systems Corp., 6.85%, 10/15/04 50,000 51,743
Oracle Corp., 6.72%, 2/15/04 20,000 20,127
Sun Microsystems, Inc., 7.35%, 8/15/04 50,000 51,633
Unisys Corp., 7.25%, 1/15/05 150,000 155,438
Unisys Corp., 7.88%, 4/1/08 175,000 181,343
- ----------------------------------------------------------------------------
460,284
- ----------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Page 26 Diamond Hill Funds Annual Report December 31,2003
Diamond Hill Short Term Fixed Income Fund
Schedule of Investments (Continued)
December 31,2003
Par Value Value
- -----------------------------------------------------------------------
Utilities -- 9.1%
Duke Capital Corp., 7.25%, 10/1/04 54,000 $55,859
GTE California, Inc., 6.75%, 3/15/04 50,000 50,537
GTE Hawaiian Telephone, 6.75%, 2/15/05 40,000 42,144
Oneok,Inc.,7.75%,8/15/06 50,000 55,687
Penn Power Co., 6.63%, 1/1/04 45,000 45,006
PSEG Energy Holdings, 9.13%, 2/10/04 175,000 175,588
PSEG Energy Holdings, 7.75%, 4/16/07 75,000 79,594
Tenn Valley Authority, 3.50%, 9/15/07 40,000 40,041
- -----------------------------------------------------------------------
544,456
- -----------------------------------------------------------------------
Total Corporate Bonds $2,363,313
- -----------------------------------------------------------------------
Mortgage-Backed Securities -- 30.9%
FHLMC,6.00%,2/15/09 167,645 168,185
FHLMC 2301,6.50%,4/15/16 4,621 4,622
FHLMC PC Gold Balloon RST,
4.00%,7/1/10 264,904 266,484
FHLMC Pool N97967,6.00%,5/1/05 200,488 206,066
FHLMC Pool N98137,5.00%,11/1/05 153,147 157,258
FNMA,6.00%,6/1/04 37,468 37,590
FNMA,6.00%,4/1/05 138,462 141,717
FNMA,6.00%,9/1/05 323,203 330,802
FNMA,5.50%,1/1/06 88,728 90,203
FNMA,5.50%,4/1/06 103,266 105,567
FNMA,5.00%,2/1/09 287,344 294,731
GMAC Mortgage Corp Loan Trust,
5.75%,11/25/32 50,000 50,790
GNMA,6.50%,9/16/27 7,189 7,217
- -----------------------------------------------------------------------
Total Mortgage-Backed Securities $1,861,232
- -----------------------------------------------------------------------
U.S.Government Agency Obligations -- 21.0%
FHLB,2.50%,11/18/05 350,000 350,591
FHLB,2.13%,11/25/05 100,000 100,107
FHLB,2.36%,11/28/05 70,000 70,128
FHLB,4.00%,9/26/07 16,000 16,001
FHLB,3.50%,4/1/08 25,000 25,035
FHLB,3.63%,11/28/08 25,000 24,900
FHLB,3.25%,12/30/08 100,000 98,099
FHLMC,3.00%,11/15/06 114,000 114,005
FHLMC,4.00%,9/15/08 80,000 80,006
FHLMC Step,3.00%,6/29/09 200,000 199,909
FHLMC,3.00%,12/15/09 43,000 43,041
FNMA,4.00%,3/12/09 100,000 100,007
FNMA,4.00%,8/13/10 50,000 49,287
- -----------------------------------------------------------------------
Total U.S.Government Agency
Obligations $1,271,116
- -----------------------------------------------------------------------
Par Value Value
- ---------------------------------------------------------------------
Cash Equivalents -- 0.4%
First American Treasury
Obligations Fund - Class A 26,907 $26,907
- ---------------------------------------------------------------------
Total Investment Securities -- 99.0%
(Amortized Cost $5,959,641) $5,972,808
- ---------------------------------------------------------------------
Other Assets In Excess
Of Liabilities-- 1.0% 58,139
- ---------------------------------------------------------------------
Net Assets-- 100.0% $6,030,947
- ---------------------------------------------------------------------
FHLMC - Federal Home Loan Mortgage Corp.
FNMA - Federal National Mortgage Assoc.
GNMA - Government National Mortgage Assoc.
FHLB - Federal Home Loan Bank
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31,2003 Page 27
Diamond Hill Strategic Income Fund
Schedule of Investments
December 31,2003
Shares Value
- ---------------------------------------------------------------
Common Stocks -- 9.2%
Energy -- 2.1%
Alliance Resource Partners, L.P. 4,600 $ 158,148
Crosstex Energy, L.P. 2,700 111,510
Heritage Propane Partners 6,800 280,432
- ---------------------------------------------------------------
550,090
- ---------------------------------------------------------------
Financial Services -- 0.8%
National City Corp. 6,000 203,640
- ---------------------------------------------------------------
Pipelines -- 2.3%
Kaneb Pipe Line Partners, L.P. 2,810 142,748
Pacific Energy Partners, L.P. 3,800 111,454
Plains All American Pipeline, L.P. 3,800 123,348
TEPPCO Partners, L.P. 2,690 108,407
Valero, L.P. 2,500 124,425
- ---------------------------------------------------------------
610,382
- ---------------------------------------------------------------
Real Estate Investment Trust -- 4.7%
Capital Automotive - REIT 6,300 201,600
Heritage Property Investment Trust 6,900 196,305
Kilroy Realty Corp. 6,650 217,788
Kimco Realty Corp. 4,800 214,800
Lexington Corporate Properties Trust 10,300 207,957
RAIT Investment Trust 8,500 217,600
- ---------------------------------------------------------------
1,256,050
- ---------------------------------------------------------------
Total Common Stocks $2,418,562
- ---------------------------------------------------------------
Preferred Stock -- 41.0%
Ace Capital Trust 8,000 211,120
ACE Ltd. 10,000 278,500
Alexandria Real Estate - REIT 3,000 84,300
AT&T Capital Corp. 16,000 399,680
Boykin Lodging Co. - REIT 1,200 34,560
Capital Automotive 2,000 50,500
CBL & Associates Series B - REIT 6,000 328,800
CBL & Associates Series C - REIT 9,500 257,450
Corporate Backed Trust
Certificates, 8.20% 5,000 133,450
Corporate Backed Trust
Certificates, 7.50% 5,000 129,550
Corporate Backed Trust
Certificates, 7.75% 5,200 147,212
Corporate Office Series B - REIT 9,000 231,750
Corporate Office Trust - REIT 4,000 108,000
Corts-TR IV Safeco Cap I 4,000 110,600
CPL Capital 10,000 253,000
Delphi Financial 4,000 106,520
Shares Value
- ----------------------------------------------------------------
Preferred Stock -- 41.0% continued
Developers Divers Realty, 8.00% - REIT 2,000 $53,960
Developers Divers Realty, 8.60% - REIT 3,000 80,100
DQE Capital Corp. 4,000 103,680
Duke Realty Corp. 16,000 401,280
EIX Trust II 16,000 407,040
Equity Inns, Inc. 7,000 190,330
Equity Office Property's Trust - REIT 1,000 25,110
Everest Re Capital Trust 3,000 82,500
Gables Residential Trust - REIT 8,000 214,000
Grand Metro Delaware, L.P 6,000 160,080
Health Care, Inc. - REIT 10,000 264,100
Huntington Preferred Capital, Inc. - REIT 10,400 293,280
IBC Capital Finance II 5,000 138,800
Innkeepers USA Trust 12,000 300,376
J.P. Morgan Chase & Co. 14,100 707,643
Lehman Capital Trust I - REIT 3,500 88,725
Lexington Corporate Property
Trust - REIT 9,500 254,125
MBNA Capital 8,000 217,680
NAB Exchangeable Preferred Trust 1,000 25,090
Nexen, Inc. 12,000 313,800
Northrop Gruman Corp. 1,500 155,550
OGE Energy Capital 4,000 105,800
Oxy Capital Trust I 18,000 451,440
Preferredplus Trust 12,000 308,040
Provident Capital Trust III 4,000 110,000
PS Business Parks, Inc. - REIT 4,000 107,440
Saturns - AWE 5,800 167,214
Saturns - CZN 5,000 138,000
Saturns - FON 10,000 267,800
Southern Union Co. 10,000 267,300
Telephone & Data Systems 4,000 106,840
The Mills Corp.-REIT 16,600 449,860
Tommy Hilfiger USA, Inc. 4,000 104,480
TXU Capital I 13,000 326,040
U.S. Cellular 3,000 85,560
Unionbancal Financial Trust I 9,500 241,015
XL Capital Ltd. 4,000 112,000
Zions Capital Trust B 4,000 109,080
- ----------------------------------------------------------------
Total Preferred Stock $10,800,150
- ----------------------------------------------------------------
- --------------------------------------------------------------------------------
Page 28 Diamond Hill Funds Annual Report December 31,2003
Diamond Hill Strategic Income Fund
Schedule of Investments (Continued)
December 31,2003
Shares Value
- ------------------------------------------------------------------
Registered Investment Companies -- 5.0%
Blackrock Preferred Opportunity Trust 15,000 $ 372,450
Conseco Strategic Income Fund 10,700 118,128
Corporate High Yield Fund 11,375 109,200
Debt Strategies Fund,Inc. 7,400 51,800
Eaton Vance Senior Income Trust 7,900 72,838
Evergreen Income Advantage Fund 7,000 110,250
Managed High Income Portfolio,Inc. 14,700 102,165
Putnam Master Intermediate Income Trust 15,000 99,000
Putnam Premier Income Trust 15,000 98,850
Salomon Brothers Global Partners
Income Fund 6,300 96,390
Salomon Brothers High Income Fund II,Inc. 6,500 85,475
- ------------------------------------------------------------------
Total Registered Investment Companies $1,316,546
- ------------------------------------------------------------------
Par Value Value
- ------------------------------------------------------------------
Corporate Bonds -- 36.4%
Consumer,Cyclical -- 3.0%
Bowater,Inc.,9.00%,8/1/09 $400,000 $443,725
Cox Communications,Inc.,
7.50%,8/15/04 25,000 25,836
Dana Corp.,10.13%,3/15/10 75,000 87,375
Ford Motor Co.,8.88%,4/1/06 212,000 234,882
- ------------------------------------------------------------------
791,818
- ------------------------------------------------------------------
Consumer,Non-Cyclical -- 2.1%
RJ Reynolds Tobacco Holdings,
7.75%,5/15/06 250,000 262,500
Royal Caribbean Cruises,
8.75%,2/2/11 250,000 282,500
- ------------------------------------------------------------------
545,000
- ------------------------------------------------------------------
Finance-- 8.4%
Ford Motor Credit Co.,5.35%,11/20/06 100,000 100,355
Ford Motor Credit Co.,9.50%,6/1/10 250,000 284,617
Ford Motor Credit Co.,7.50%,4/25/11 150,000 155,580
GATX Financial Corp.,6.88%,11/1/04 50,000 51,341
GATX Financial Corp.,7.75%,12/1/06 420,000 449,314
Morgan Stanley,4.50%,11/1/13 275,000 271,711
Provident Bank,6.38%,1/15/04 150,000 150,120
SLM Corp.,4.25%,10/1/10 250,000 249,255
UBS Ag Structured,5.07%,6/20/08 500,000 500,491
- ------------------------------------------------------------------
2,212,784
- ------------------------------------------------------------------
Industrial -- 8.7%
D.R.Horton,Inc.,7.50%,12/1/07 220,000 240,900
DPL,Inc.,8.25%,3/1/07 250,000 272,500
Geogia-Pacific Corp.,7.50%,5/15/06 50,000 52,875
K.B.Home,7.75%,2/1/10 225,000 238,500
- ------------------------------------------------------------------
Shares Value
- ------------------------------------------------------------------
Industrial -- 8.7% continued
K.B.Home,9.50%,2/15/11 300,000 $ 334,500
Standard Pacific Corp.,6.88%,5/15/11 150,000 155,250
Standard Pacific Corp.,7.75%,3/15/13 300,000 318,000
Toll Corp.,8.13%,2/1/09 270,000 280,125
Toll Corp.,8.25%,2/1/11 200,000 220,000
Toll Corp.,8.25%,12/1/11 175,000 193,156
- ------------------------------------------------------------------
2,305,806
- ------------------------------------------------------------------
Manufacturing -- 2.4%
Avnet,Inc,7.88%,2/15/05 200,000 209,000
Tyco International Group SA,
6.13%,11/1/08 100,000 107,000
Tyco International Group SA,
6.75%,2/15/11 280,000 305,900
- ------------------------------------------------------------------
621,900
- ------------------------------------------------------------------
Retail -- 6.2%
American Greetings,6.10%,8/1/28 480,000 492,000
Penney (J.C.) Co.,Inc.,6.00%,5/1/06 263,000 265,630
Penney (J.C.) Co.,Inc.,9.75%,6/15/21 236,000 245,735
Tommy Hilfiger Usa,Inc.,6.85%,6/1/08 200,000 200,500
Toys "R" Us,7.63%,8/1/11 395,000 422,804
- ------------------------------------------------------------------
1,626,669
- ------------------------------------------------------------------
Technology -- 2.5%
Ametek,Inc.,7.20%,7/15/08 100,000 109,250
Unisys Corp.,7.88%,4/1/08 250,000 259,063
Unisys Corp.,6.88%,3/15/10 275,000 297,687
- ------------------------------------------------------------------
666,000
- ------------------------------------------------------------------
Transportation -- 1.4%
General American Transportation,
6.75%,5/1/09 125,000 128,896
Northwest Air,Inc.,8.52%,4/7/04 250,000 251,250
- ------------------------------------------------------------------
375,000 380,146
- ------------------------------------------------------------------
Utilities -- 1.7%
International Telephone,7.50%,7/1/11 40,000 40,060
PSEG Energy Holdings,9.13%,2/10/04 50,000 50,250
PSEG Energy Holdings,7.75%,4/16/07 175,000 185,718
PSEG Energy Holdings,8.63%,2/15/08 150,000 163,688
- ------------------------------------------------------------------
439,716
- ------------------------------------------------------------------
Total Corporate Bonds $9,589,839
- ------------------------------------------------------------------
U.S.Government Agency Obligations -- 2.6%
FHLMC Step,3.00%,6/29/09 275,000 274,874
FNMA,4.00%,8/26/16 400,000 403,629
- ------------------------------------------------------------------
Total U.S.Government Agency
Obligations $678,503
- ------------------------------------------------------------------
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2003 Page 29
Diamond Hill Strategic Income Fund
Schedule of Investments (Continued)
December 31,2003
Shares Value
- -----------------------------------------------------------------
Cash Equivalents -- 3.1%
First American Treasury
Obligations Fund - Class A 812,357 $ 812,357
- -----------------------------------------------------------------
Total Investment Securities -- 98.0%
(Amortized Cost $24,912,685) $25,817,557
Other Assets In Excess
Of Liabilities -- 2.0% 533,680
- -----------------------------------------------------------------
Net Assets -- 100.0% $26,351,237
- -----------------------------------------------------------------
REIT - Real Estate Investment Trust.
FHLMC - Federal Home Loan Mortgage Corp.
FNMA - Federal National Mortgage Assoc.
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
Page 30 Diamond Hill Funds Annual Report December 31,2003
Diamond Hill Funds
Statements of Assets & Liabilities
December 31,2003
Short Term
Bank & Fixed Strategic
Focus Small Cap Large Cap Financial Income Income
Fund Fund Fund Fund Fund Fund
- --------------------------------------------------------------------------------------------- -------------------------------------
Assets
Investment Securities:
At amortized cost $19,935,518 $13,742,578 $5,826,838 $10,049,673 $5,959,641 $24,912,685
---------------------------------------------------------------------------
At market value $24,149,374 $18,863,193 $7,290,764 $13,525,947 $5,972,808 $25,817,557
Deposits with brokers for securities sold short 4,818,772 -- -- -- -- --
Cash -- -- -- 847,929 864 --
Receivable for securities sold 653,229 -- -- -- -- 702,622
Receivable for fund shares issued 182,826 280,143 20,638 74,751 -- 107,936
Receivable for dividends and interest 50,761 29,750 10,916 21,087 61,405 240,594
---------------------------------------------------------------------------
Total Assets 29,854,962 19,173,086 7,322,318 14,469,714 6,035,077 26,868,709
---------------------------------------------------------------------------
Liabilities
Securities sold short,at value (proceeds $5,544,947) 7,186,102 -- -- -- -- --
Dividends payable -- -- 1,002 3,991 -- 20,149
Payable for securities purchased -- -- -- -- -- 450,582
Payable for dividends on securities sold short 16,985 -- -- -- -- --
Payable for fund shares redeemed -- -- 988 -- -- 1,385
Payable to Investment Adviser 16,174 12,419 4,063 11,821 1,539 10,372
Accrued distribution and service fees 21,142 22,653 5,489 11,856 282 25,649
Other accrued expenses and liabilities 8,086 6,986 2,612 5,321 2,309 9,335
---------------------------------------------------------------------------
Total Liabilities 7,248,489 42,058 14,154 32,989 4,130 517,472
---------------------------------------------------------------------------
Net Assets $20,606,473 $19,131,028 $7,308,164 $14,436,725 $6,030,947 $26,351,237
---------------------------------------------------------------------------
Components of Net Assets
Paid-in capital $20,253,463 $14,215,790 $6,280,955 $10,555,871 $6,038,011 $25,092,278
Distribution in excess of net investment income -- -- -- -- (17,634) --
Accumulated net realized gains (losses) from
investment transactions (219,691) (205,377) (436,717) 404,580 (2,597) 354,087
Unrealized appreciation on investments 2,572,701 5,120,615 1,463,926 3,476,274 13,167 904,872
---------------------------------------------------------------------------
Net Assets $22,606,473 $19,131,028 $7,308,164 $14,436,725 $6,030,947 $26,351,237
---------------------------------------------------------------------------
Pricing of Class A Shares
Net assets attributable to Class A shares $16,216,882 $11,918,511 $6,437,436 $12,462,586 $ 472,918 $17,923,153
Shares of beneficial interest outstanding
(unlimited number of shares authorized, no par value) 1,380,727 708,562 622,558 695,416 47,229 1,547,656
---------------------------------------------------------------------------
Net asset value and redemption price per share $ 11.75 $ 16.82 $ 10.34 $ 17.92 $ 10.01 $ 11.58
---------------------------------------------------------------------------
Maximum offering price per share $ 12.47 $ 17.85 $ 10.97 $ 19.01 $ 10.29 $ 12.16
---------------------------------------------------------------------------
Pricing of Class C Shares
Net assets attributable to Class C shares $ 6,389,591 $ 7,212,517 $ 870,728 $ 1,974,139 $ -- $ 8,428,084
---------------------------------------------------------------------------
Shares of beneficial interest outstanding
(unlimited number of shares authorized,no par value) 556,658 438,449 85,080 113,531 -- 727,955
---------------------------------------------------------------------------
Net asset value and redemption price per share/A/ $ 11.48 $ 16.45 $ 10.23 $ 17.39 $ -- $ 11.58
---------------------------------------------------------------------------
Maximum offering price per share $ 11.60 $ 16.62 $ 10.33 $ 17.57 $ -- $ 11.70
----------- ----------- -------------------------------------------------
Pricing of Class I Shares
Net assets attributable to Class I shares $ -- $ -- $ -- $ -- $5,558,029 $ --
---------------------------------------------------------------------------
Shares of beneficial interest outstanding
(unlimited number of shares authorized,no par value) -- -- -- -- 555,566 --
---------------------------------------------------------------------------
Net asset value and redemption price per share $ -- $ -- $ -- $ -- $ 10.00 $ --
---------------------------------------------------------------------------
Maximum offering price per share $ -- $ -- $ -- $ -- $ 10.00 $ --
---------------------------------------------------------------------------
/(A)/ Redemption price per share varies based upon holding period.
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2003 Page 31
Diamond Hill Funds
Statements of Operations
For the year ended December 31, 2003
Short Term
Bank & Fixed Strategic
Focus Small Cap Large Cap Financial Income Income
Fund Fund Fund Fund Fund Fund
- --------------------------------------------------------------------------------------------- ------------------------------------
Investment Income:
Dividends $ 190,729 $ 97,768 $ 93,013 $ 219,845 $ 20,836 $ 515,048
Interest 61,753 27,631 4,636 13,499 105,838 361,226
--------------------------------------------------------------------------
Total Investment Income 252,482 125,399 97,649 233,344 126,674 876,274
--------------------------------------------------------------------------
Expenses:
Investment Advisory fees 137,771 109,602 33,961 109,351 10,784 60,257
Administration fees 68,886 61,651 21,832 49,208 16,176 54,232
Distribution fees - Class A 30,104 20,127 10,778 22,628 1,373 22,800
Distribution and service fees - Class C 30,374 56,754 4,667 12,305 -- 29,454
Trustees fees 2,000 2,000 2,000 2,000 2,000 2,000
Dividend expense on securities sold short 16,985 -- -- -- -- --
--------------------------------------------------------------------------
Total Expenses 286,120 250,134 73,238 195,492 30,333 168,743
Fees waived and expenses reimbursed by the
Investment Adviser (2,000) (2,000) (2,000) (2,000) (2,000) (2,000
--------------------------------------------------------------------------
Net Expenses 284,120 248,134 71,238 193,492 28,333 166,743
--------------------------------------------------------------------------
Net Investment Income (Loss) (31,638) (122,735) 26,411 39,852 98,341 709,531
--------------------------------------------------------------------------
Realized and Unrealized Gains (Losses)
on Investments
Net realized gains (losses) from security transactions 232,884 (180,776) 19,475 1,345,518 (3,046) 549,468
Net change in unrealized appreciation/depreciation
on Investments 3,103,206 6,077,295 1,459,861 2,390,948 (9,909) 858,518
--------------------------------------------------------------------------
Net Realized and Unrealized Gains (Losses)
on Investments 3,336,090 5,896,519 1,479,336 3,736,466 (6,863) 1,407,986
--------------------------------------------------------------------------
Net Changes in Net Assets from Operations $3,304,452 $5,773,784 $1,505,747 $3,776,318 $ 91,478 $2,117,517
--------------------------------------------------------------------------
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
Page 32 Diamond Hill Funds Annual Report December 31,2003
Diamond Hill Funds
Statements of Changes in Net Assets
Focus Fund Small 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,
2003 2002 2003 2002
--------------------------- ---------------------------
From Operations
Net investment loss $ (31,638) $ (67,085) $ (122,735) $ (100,385)
Net realized gains (losses) from investment transactions 232,884 (275,469) (180,776) 175,149
Net change in unrealized appreciation/depreciation on investments 3,103,206 (1,022,294) 6,077,295 (1,550,380)
--------------------------- ---------------------------
Net Change in Net Assets from Operations 3,304,452 (1,364,848) 5,773,784 (1,475,616)
--------------------------- ---------------------------
Distributions to Shareholders
From net realized gains on investments - Class A -- -- (60,726) (10,574)
From net realized gains on investments - Class C -- -- (38,074) (7,901)
--------------------------- ---------------------------
Decrease in Net Assets from Distributions to Shareholders -- -- (98,800) (18,475)
--------------------------- ---------------------------
From Capital Transactions
Class A
Proceeds from shares sold 6,620,918 6,873,928 4,717,961 4,067,924
Reinvested distributions -- -- 55,393 9,771
Payments for shares redeemed (4,504,896) (5,232,106) (2,793,897) (2,108,380)
--------------------------- ---------------------------
Net Increase in Net Assets from Class A
Share Transactions 2,116,022 1,641,822 1,979,457 1,969,315
--------------------------- ---------------------------
Class C
Proceeds from shares sold 4,166,785 749,996 2,637,880 4,799,701
Reinvested distributions -- -- 31,461 6,913
Payments for shares redeemed (666,385) (527,124) (2,697,694) (375,981)
--------------------------- ---------------------------
Net Increase (Decrease) in Net Assets from Class C
Share Transactions 3,500,400 222,872 (28,353) 4,430,633
--------------------------- ---------------------------
Total Increase in Net Assets 8,920,874 499,846 7,626,088 4,905,857
Net Assets
Beginning of year 13,685,599 13,185,753 11,504,940 6,599,083
--------------------------- ---------------------------
End of year $22,606,473 $13,685,599 $19,131,028 $11,504,940
=========================== ===========================
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2003 Page 33
Diamond Hill Funds
Statements of Changes in Net Assets
Large Cap 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,
2003 2002 2003 2002
--------------------------- ---------------------------
From Operations
Net investment income $ 26,411 $ 16,645 $ 39,852 $ 26,216
Net realized gains (losses) from investment transactions 19,475 (456,153) 1,345,518 1,957,344
Net change in unrealized appreciation/depreciation on investments 1,459,861 (173,717) 2,390,948 (1,010,095)
--------------------------- ---------------------------
Net Change in Net Assets from Operations 1,505,747 (613,225) 3,776,318 973,465
--------------------------- ---------------------------
Distributions to Shareholders
From net investment income - Class A (26,310) (16,645) (39,852) (24,017)
From net investment income - Class C (332) -- -- (2,199)
From net realized gains on investments - Class A -- (26,705) (843,497) (1,406,961)
From net realized gains on investments - Class C -- (2,118) (141,927) (111,201)
--------------------------- ---------------------------
Decrease in Net Assets from Distributions to Shareholders (26,642) (45,468) (1,025,276) (1,544,378)
--------------------------- ---------------------------
From Capital Transactions
Class A
Proceeds from shares sold 2,745,439 1,965,588 3,489,934 17,192,340
Reinvested distributions 25,390 40,297 807,819 1,301,822
Payments for shares redeemed (952,674) (893,403) (4,251,333) (21,261,818)
--------------------------- ---------------------------
Net Increase (Decrease) in Net Assets from Class A
Share Transactions 1,818,155 1,112,482 46,420 (2,767,656)
--------------------------- ---------------------------
Class C
Proceeds from shares sold 784,890 71,114 842,497 771,094
Reinvested distributions 308 1,980 105,945 107,386
Payments for shares redeemed (334,046) (11,093) (78,803) (111,320)
--------------------------- ---------------------------
Net Increase in Net Assets from Class C
Share Transactions 451,152 62,001 869,639 767,160
--------------------------- ---------------------------
Total Increase (Decrease) in Net Assets 3,748,412 515,790 3,667,101 (2,571,409)
Net Assets
Beginning of year 3,559,752 3,043,962 10,769,624 13,341,033
--------------------------- ---------------------------
End of year $7,308,164 $3,559,752 $14,436,725 $10,769,624
=========================== ===========================
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
Page 34 Diamond Hill Funds Annual Report December 31, 2003
Diamond Hill Funds
Statements of Changes in Net Assets
Short Term Strategic
Fixed Income Income
Fund Fund
--------------------------- ---------------------------
For the Year For the Year For the Year For the Year
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
2003 2002/(A)/ 2003 2002/(B)/
--------------------------- ---------------------------
From Operations
Net investment income $ 98,341 $ 51,622 $ 709,531 $ 25,441
Net realized gains (losses) from investment
transactions 3,046 (5,643) 549,468 5,410
Net change in unrealized appreciation/depreciation
on investments (9,909) 23,076 858,518 46,354
--------------------------- ---------------------------
Net Change in Net Assets from Operations 91,478 69,055 2,117,517 77,205
--------------------------- ---------------------------
Distributions to Shareholders
From net investment income - Class A (15,150) (14,738) (549,681) (24,994)
From net investment income - Class C -- -- (159,850) (447)
From net investment income - Class I (100,825) (36,884) -- --
From net realized gains on investments - Class A -- -- (136,498) (2,876)
From net realized gains on investments - Class C -- -- (61,355) (62)
--------------------------- ---------------------------
Decrease in Net Assets from Distributions to
Shareholders (115,975) (51,622) (907,384) (28,379)
--------------------------- ---------------------------
From Capital Transactions
Class A
Proceeds from shares sold 328,829 1,567,180 14,442,711 2,073,583
Reinvested distributions 15,004 9,686 640,414 20,608
Payments for shares redeemed (585,943) (858,717) (196,825) (50,050)
--------------------------- ---------------------------
Net Increase (Decrease) in Net Assets from Class A
Share Transactions (242,110) 718,149 14,886,300 2,044,141
--------------------------- ---------------------------
Class C
Proceeds from shares sold -- -- 8,291,544 92,527
Reinvested distributions -- -- 147,547 322
Payments for shares redeemed -- -- (370,103) --
--------------------------- ---------------------------
Net Increase in Net Assets from Class C
Share Transactions -- -- 8,068,988 92,849
--------------------------- ---------------------------
Class I
Proceeds from shares sold 5,400,000 2,759,182 -- --
Reinvested distributions 99,941 28,063 -- --
Payments for shares redeemed (2,328,483) (396,731) -- --
--------------------------- ---------------------------
Net Increase in Net Assets from Class I
Share Transactions 3,171,458 2,390,514 -- --
--------------------------- ---------------------------
Total Increase in Net Assets 2,904,851 3,126,096 24,165,421 2,185,816
Net Assets
Beginning of period 3,126,096 -- 2,185,816 --
--------------------------- ---------------------------
End of period $ 6,030,947 $3,126,096 $26,351,237 $2,185,816
=========================== ===========================
/(A)/ Represents the period from commencement of operations (June 28, 2002) for
Class A and Class I shares, respectively, through December 31, 2002.
/(B)/ Represents the period from commencement of operations (September 30, 2002)
for Class A and Class C shares, respectively, through December 31, 2002.
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2003 Page 35
Diamond Hill Funds
Financial Highlights
For a share outstanding throughout the period.
Year Ended Year Ended Period Ended Period Ended
December 31, December 31, December 31, February 28,
Diamond Hill Focus Fund - Class A 2003 2002 2001/(A)/ 2001/(B)/
----------------------------------------------------------
Net asset value at beginning of period $ 9.56 $ 10.67 $ 11.44 $ 10.00
----------------------------------------------------------
Income (loss) from investment operations:
Net investment loss (0.01) (0.06) (0.04) --
Net realized and unrealized gains (losses) on investments 2.20 (1.05) (0.56) 1.44
----------------------------------------------------------
Total from investment operations 2.19 (1.11) (0.60) 1.44
----------------------------------------------------------
Distributions from net realized gains -- -- (0.17) --
----------------------------------------------------------
Net asset value at end of period $ 11.75 $ 9.56 $ 10.67 $ 11.44
==========================================================
Total return/(C)/ 22.91% (10.40%) (5.20%)/(D)/ 14.43%/(D)/
==========================================================
Net assets at end of period (000s) $16,217 $11,518 $10,988 $10,352
==========================================================
Ratio of net expenses to average net assets,excluding
dividends on securities sold short 1.59% 1.51% 1.67% 1.75%
Ratio of dividend expense on securities sold short 0.04% 0.09% -- --
----------------------------------------------------------
Ratio of net expenses to average net assets 1.63% 1.60% 1.67% /(E)/ 1.75%/(E)/
----------------------------------------------------------
Ratio of net investment loss to average net assets (0.07%) (0.39%) (0.46%)/(E)/ (0.05%)/(E)/
Ratio of gross expenses to average net assets 1.64% 1.63% 1.69% /(E)/ 1.85%/(E)/
Portfolio turnover rate 9% 46% 66% /(E)/ 49%/(E)/
/(A)/ Effective after the close of business on February 28, 2001, the Fund
changed its fiscal year-end to December 31.
/(B)/ Class A commenced operations on June 30, 2000. The Fund did not open to
shareholders until August 3, 2000. Financial Highlights for the period
from June 30 to August 2, 2000, relate only to the initial shareholder.
/(C)/ Total returns shown exclude the effect of applicable sales charges.
/(D)/ Not annualized.
/(E)/ Annualized.
Year Ended Year Ended Period Ended Period Ended
December 31, December 31, December 31, February 28,
Diamond Hill Focus Fund - Class C 2003 2002 2001/(A)/ 2001/(B)/
---------------------------------------------------------
Net asset value at beginning of period $ 9.42 $ 10.60 $11.44 $11.80
---------------------------------------------------------
Loss from investment operations:
Net investment loss (0.04) (0.29) (0.07) --
Net realized and unrealized gains (losses) on investments 2.10 (0.89) (0.60) (0.36)
---------------------------------------------------------
Total from investment operations 2.06 (1.18) (0.67) (0.36)
---------------------------------------------------------
Distributions from net realized gains -- -- (0.17) --
---------------------------------------------------------
Net asset value at end of period $11.48 $ 9.42 $10.60 $11.44
=========================================================
Total return/(C)/ 21.87% (11.13%) (5.81%)/(D)/ (3.05%)/(D)/
=========================================================
Net assets at end of period (000s) $6,390 $ 2,168 $2,198 $ 349
=========================================================
Ratio of net expenses to average net assets,excluding
dividends on securities sold short 2.34% 2.09% 2.38% 2.50%
Ratio of dividend expense on securities sold short 0.40% 0.26% -- --
---------------------------------------------------------
Ratio of net expenses to average net assets 2.74% 2.35% 2.38%/(E)/ 2.50%/(E)/
---------------------------------------------------------
Ratio of net investment income (loss) to average net assets (0.75%) (1.15%) (1.15%)/(E)/ 1.57%/(E)/
Ratio of gross expenses to average net assets 2.78% 2.38% 2.41%/(E)/ 4.10%/(E)/
Portfolio turnover rate 9% 46% 66%/(E)/ 49%/(E)/
/(A)/ Effective after the close of business on February 28, 2001, the Fund
changed its fiscal year-end to December 31.
/(B)/ Class C commenced operations on February 13, 2001.
/(C)/ Total returns shown exclude the effect of applicable sales charges.
/(D)/ Not annualized.
/(E)/ Annualized.
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
Page 36 Diamond Hill Funds Annual Report December 31, 2003
Diamond Hill Funds
Financial Highlights
For a share outstanding throughout the period.
Year Ended Year Ended Period Ended Period Ended
December 31, December 31, December 31, February 28,
Diamond Hill Small Cap Fund - Class A 2003 2002 2001/(A)/ 2001/(B)/
=========================================================
Net asset value at beginning of period $ 11.26 $12.29 $11.26 $10.00
---------------------------------------------------------
Income (loss) from investment operations:
Net investment income (loss) (0.06) (0.17) (0.03) 0.02
Net realized and unrealized gains (losses) on investments 5.71 (0.84) 1.31 1.24
---------------------------------------------------------
Total from investment operations 5.65 (1.01) 1.28 1.26
---------------------------------------------------------
Less Distributions:
Dividends from net investment income -- -- (0.01) --
Distributions from net realized gains (0.09) (0.02) (0.24) --
---------------------------------------------------------
Total distributions (0.09) (0.02) (0.25) --
---------------------------------------------------------
Net asset value at end of period $ 16.82 $11.26 $12.29 $11.26
=========================================================
Total return/(C)/ 50.18% (8.23%) 11.42%/(D)/ 12.60%/(D)/
=========================================================
Net assets at end of period (000s) $11,919 $6,603 $5,315 $1,657
=========================================================
Ratio of net expenses to average net assets 1.50% 1.50% 1.58%/(E)/ 1.75%/(E)/
Ratio of net investment income (loss) to average net assets (0.57%) (0.70%) (0.35%)/(E)/ 2.71%/(E)/
Ratio of gross expenses to average net assets 1.51% 1.53% 1.67%/(E)/ 2.94%/(E)/
Portfolio turnover rate 53% 49% 43%/(E)/ 3%/(E)/
/(A)/ Effective after the close of business on February 28, 2001, the Fund
changed its fiscal year-end to December 31.
/(B)/ Class A commenced operations on December 29,2000. The Fund did not open to
shareholders until February 7, 2001. Financial Highlights for the period
from December 29, 2000 to February 6, 2001, relate only to the initial
shareholder.
/(C)/ Total returns shown exclude the effect of applicable sales charges.
/(D)/ Not annualized.
/(E)/ Annualized.
Year Ended Year Ended Period Ended Period Ended
December 31, December 31, December 31, February 28,
Diamond Hill Small Cap Fund - Class C 2003 2002 2001/(A)/ 2001/(B)/
=========================================================
Net asset value at beginning of period $11.09 $12.21 $11.26 $11.39
---------------------------------------------------------
Income (loss) from investment operations:
Net investment loss (0.18) (0.23) (0.05) --
Net realized and unrealized gains (losses) on investments 5.63 (0.87) 1.24 (0.13)
---------------------------------------------------------
Total from investment operations 5.45 (1.10) 1.19 (0.13)
---------------------------------------------------------
Distributions from net realized gains (0.09) (0.02) (0.24) --
---------------------------------------------------------
Net asset value at end of period $16.45 $11.09 $12.21 $11.26
=========================================================
Total return/(C)/ 49.15% (9.02%) 10.66%/(D)/ (1.14%)/(D)/
=========================================================
Net assets at end of period (000s) $7,213 $4,902 $1,284 $ 20
=========================================================
Ratio of net expenses to average net assets 2.25% 2.25% 2.26%/(E)/ 2.50%/(E)/
Ratio of net investment income (loss) to average net assets (1.35%) (1.40%) (1.15%)/(E)/ 0.80%/(E)/
Ratio of gross expenses to average net assets 2.26% 2.28% 2.35%/(E)/ 3.97% (E)/
Portfolio turnover rate 53% 49% 43%/(E)/ 3% (E)/
/(A)/ Effective after the close of business on February 28, 2001, the Fund
changed its fiscal year-end to December 31.
/(B)/ Class C commenced operations on February 20, 2001.
/(C)/ Total returns shown exclude the effect of applicable sales charges.
/(D)/ Not annualized.
/(E)/ Annualized.
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2003 Page 37
Diamond Hill Funds
Financial Highlights
For a share outstanding throughout the period.
Year Ended Year Ended Period Ended
December 31, December 31, December 31,
Diamond Hill Large Cap Fund - Class A 2003 2002 2001/(A)/
------------------------------------------
Net asset value at beginning of period $ 7.87 $ 10.06 $10.00
------------------------------------------
Income (loss) from investment operations:
Net investment income 0.04 0.04 0.01
Net realized and unrealized gains (losses) on investments 2.47 (2.13) 0.06
------------------------------------------
Total from investment operations 2.51 (2.09) 0.07
------------------------------------------
Less Distributions:
Dividends from net investment income (0.04) (0.04) (0.01)
Distributions from net realized gains -- (0.06) --
------------------------------------------
Total distributions (0.04) (0.10) (0.01)
------------------------------------------
Net asset value at end of period $10.34 $ 7.87 $10.06
==========================================
Total return/(B)/ 31.92% (20.74%) 0.69%/(C)/
==========================================
Net assets at end of period (000s) $6,437 $ 3,300 $2,782
==========================================
Ratio of net expenses to average net assets 1.39% 1.40% 1.40%/(D)/
Ratio of net investment income to average net assets 0.62% 0.62% 0.38%/(D)/
Ratio of gross expenses to average net assets 1.42% 1.46% 1.57%/(D)/
Portfolio turnover rate 32% 71% 19%/(D)/
/(A)/ Class A commenced operations on June 29, 2001.
/(B)/ Total returns shown exclude the effect of applicable sales charges.
/(C)/ Not annualized.
/(D)/ Annualized.
Year Ended Year Ended Period Ended
December 31, December 31, December 31,
Diamond Hill Large Cap Fund - Class C 2003 2002 2001/(A)/
------------------------------------------
Net asset value at beginning of period $ 7.81 $ 10.06 $ 8.87
------------------------------------------
Income (loss) from investment operations:
Net investment loss -- -- (0.01)
Net realized and unrealized gains (losses) on investments 2.42 (2.19) 1.20
------------------------------------------
Total from investment operations 2.42 (2.19) 1.19
------------------------------------------
Distributions from net realized gains -- (0.06) --
------------------------------------------
Net asset value at end of period $10.23 $ 7.81 $10.06
==========================================
Total return/(B)/ 31.04% (21.73%) 13.42%/(C)/
==========================================
Net assets at end of period (000s) $ 871 $ 260 $ 262
==========================================
Ratio of net expenses to average net assets 2.14% 2.15% 2.15%/(D)
Ratio of net investment income (loss) to average net assets (0.14%) (0.10%) (0.41%)/(D)/
Ratio of gross expenses to average net assets 2.36% 2.81% 2.32%/(D)/
Portfolio turnover rate 32% 71% 19%/(D)/
/(A)/ Class C commenced operations on September 25, 2001.
/(B) Total returns shown exclude the effect of applicable sales charges.
/(C)/ Not annualized.
/(D)/ Annualized.
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
Page 38 Diamond Hill Funds Annual Report December 31, 2003
Diamond Hill Funds
Financial Highlights
For a share outstanding throughout the period.
Year Ended Year Ended Period Ended Year Ended Year Ended Year Ended
Diamond Hill Bank & Financial Fund - December 31, December 31, December 31, February 28, February 29, February 28,
Class A 2003 2002 2001/(A)/ 2001 2000 1999
====================================================================================================================================
Net asset value at beginning of
period $ 13.63 $14.25 $ 11.85 $ 9.40 $ 10.72 $ 12.75
---------------------------------------------------------------------------------------------
Income (loss) from investment
operations:
Net investment income (loss) 0.07 0.03 -- (0.02) (0.06) (0.15)
Net realized and unrealized
gains (losses) on investments 5.60 1.58 2.40 2.47 (1.19) (1.22)
---------------------------------------------------------------------------------------------
Total from investment operations 5.67 1.61 2.40 2.45 (1.25) (1.37)
---------------------------------------------------------------------------------------------
Less Distributions:
Dividends from net investment
income (0.06) (0.03) -- -- -- --
Distributions from net realized
gains (1.32) (2.20) -- -- (0.07) (0.66)
---------------------------------------------------------------------------------------------
Total distributions (1.38) (2.23) -- -- (0.07) (0.66)
---------------------------------------------------------------------------------------------
Net asset value at end of period $ 17.92 $13.63 $ 14.25 $ 11.85 $ 9.40 $ 10.72
=============================================================================================
Total return/(B)/ 41.85% 11.22% 20.25%/(C)/ 26.06% (11.75%)/(C)/ (10.79%)
=============================================================================================
Net assets at end of period (000s) $12,463 $9,983 $13,214 $11,772 $ 9,411 $15,716
=============================================================================================
Ratio of net expenses to average
net assets 1.68% 1.70% 1.72%/(D)/ 1.81% 2.17%/(D)/ 2.50%
Ratio of net investment income
(loss) to average net assets 0.45% 0.20% (0.03%)/(D)/ (0.25%) (0.40%)/(D)/ (1.27%)
Ratio of gross expenses to average
net assets 1.69% 1.72% 1.74%/(D)/ 1.88% 2.26%/(D)/ 2.50%
Portfolio turnover rate 53% 104% 52%/(D)/ 142% 119%/(D)/ 54%
/(A)/ Effective after the close of business on February 28, 2001, the Fund
changed its fiscal year end to December 31.
/(B)/ Total returns shown exclude the effect of applicable sales charges.
/(C)/ Not annualized.
/(D)/ Annualized.
Year Ended Year Ended Period Ended Year Ended Period Ended
December 31, December 31, December 31, February 28, February 29,
Diamond Hill Bank & Financial Fund - Class C 2003 2002 2001/(A)/ 2001 2000/(B)/
===========================================================================
Net asset value at beginning of period $13.31 $14.05 $11.72 $ 9.34 $ 11.23
Income (loss) from investment operations:
Net investment income (loss) (0.06) 0.04 (0.11) (0.07) (0.05)
Net realized and unrealized gains (losses)
on investments 5.46 1.46 2.44 2.45 (1.77)
---------------------------------------------------------------------------
Total from investment operations 5.40 1.50 2.33 2.38 (1.82)
---------------------------------------------------------------------------
Less Distributions:
Dividends from net investment income -- (0.04) -- -- --
Distributions from net realized gains (1.32) (2.20) -- -- (0.07)
---------------------------------------------------------------------------
Total distributions (1.32) (2.24) -- -- (0.07)
---------------------------------------------------------------------------
Net asset value at end of period $17.39 $13.31 $14.05 $11.72 $ 9.34
===========================================================================
Total return/(C)/ 40.85% 10.55% 19.88%/(D)/ 25.48% (16.29%)/(D)/
===========================================================================
Net assets at end of period (000s) $1,974 $ 787 $ 127 $ 129 $ 71
===========================================================================
Ratio of net expenses to average net assets 2.45% 2.45% 2.47%/(E)/ 2.56% 2.74% /(E)/
Ratio of net investment loss to average net
assets (0.30%) 0.49% (0.77%)/(E)/ (0.97%) (0.82%)/(E)/
Ratio of gross expenses to average net assets 2.53% 2.47% 2.49%/(E)/ 2.63% 2.84% /(E)/
Portfolio turnover rate 53% 104% 52%/(E)/ 142% 119% /(E)/
/(A)/ Effective after the close of business on February 28, 2001, the Fund
changed its fiscal year end to December 31.
/(B)/ Class C commenced operations on June 3, 1999.
/(C)/ Total returns shown exclude the effect of applicable sales charges.
/(D)/ Not annualized.
/(E)/ Annualized.
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2003 Page 39
Diamond Hill Funds
Financial Highlights
For a share outstanding throughout the period.
Class A Class A Class I Class I
Period Ended Period Ended Year Ended Period Ended
December 31, December 31, December 31, December 31,
Diamond Hill Short Term Fixed Income Fund 2003 2002/(A)/ 2003 2002(A)
----------------------------------------------------------
Net asset value at beginning of period $10.08 $10.00 $10.08 $10.00
----------------------------------------------------------
Income from investment operations:
Net investment income 0.27 0.18 0.31 0.19
Net realized and unrealized gains on investments (0.07) 0.08 (0.08) 0.08
----------------------------------------------------------
Total from investment operations 0.20 0.26 0.23 0.27
----------------------------------------------------------
Dividends from net investment income (0.27) (0.18) (0.31) (0.19)
----------------------------------------------------------
Net asset value at end of period $10.01 $10.08 $10.00 $10.08
==========================================================
Total return/(B)/ 2.04% 2.60%/(C)/ 2.29% 2.70%/(C)/
==========================================================
Net assets at end of period (000s) $ 473 $ 719 $5,558 $2,407
==========================================================
Ratio of net expenses to average net assets 1.00% 1.00%/(D)/ 0.75% 0.75%/(D)/
Ratio of net investment income to average net assets 2.79% 1.82%/(D)/ 3.29% 1.89%/(D)/
Ratio of gross expenses to average net assets 1.19% 1.04%/(D)/ 0.78% 0.79%/(D)/
Portfolio turnover rate 118% 71%/(D)/ 118% 71%/(D)/
/(A)/ Represents the period from commencement of operations (June 28, 2002)
through December 31, 2002.
/(B)/ Total returns shown exclude the effect of applicable sales charges.
/(C)/ Not annualized.
/(D)/ Annualized.
See accompanying notes to financial statements.
Class A Class A Class C Class C
Period Ended Period Ended Year Ended Period Ended
December 31, December 31, December 31, December 31,
Diamond Hill Strategic Income Fund 2003 2002/(A)/ 2003 2002/(A)/
----------------------------------------------------------
Net asset value at beginning of period $ 10.28 $10.00 $10.28 $10.00
----------------------------------------------------------
Income from investment operations:
Net investment income 0.67 0.15 0.60 0.19
Net realized and unrealized gains on investments 1.39 0.30 1.39 0.30
----------------------------------------------------------
Total from investment operations 2.06 0.45 1.99 0.49
----------------------------------------------------------
Less distributions
Dividends from net investment income (0.67) (0.15) (0.60) (0.19)
Distributions from net realized gains (0.09) (0.02) (0.09) (0.02)
----------------------------------------------------------
Total distributions (0.76) (0.17) (0.69) (0.21)
----------------------------------------------------------
Net asset value at end of period $ 11.58 $10.28 $11.58 $10.28
==========================================================
Total return/(B)/ 20.67% 4.49%/(C)/ 19.86% 4.85%/(C)/
==========================================================
Net assets at end of period (000s) $17,923 $2,092 $8,428 $ 94
==========================================================
Ratio of net expenses to average net assets 1.19% 1.20%/(D)/ 1.93% 1.95%/(D)/
Ratio of net investment income to average net assets 6.01% 1.76%/(D)/ 5.39% 2.64%/(D)/
Ratio of gross expenses to average net assets 1.21% 1.23%/(D)/ 1.97% 1.98%/(D)/
Portfolio turnover rate 83% 77%/(D)/ 83% 77%/(D)/
/(A)/ Represents the period from commencement of operations (September 30, 2002)
through December 31, 2002.
/(B)/ Total returns shown exclude the effect of applicable sales charges.
/(C)/ Not annualized.
/(D)/ Annualized.
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
Page 40 Diamond Hill Funds Annual Report December 31,2003
Diamond Hill Funds
Notes to Financial Statements
December 31,2003
Organization
The Diamond Hill Focus Fund ("Focus Fund"), Diamond Hill Small Cap Fund ("Small
Cap Fund"), Diamond Hill Large Cap Fund ("Large Cap Fund"), Diamond Hill Bank &
Financial Fund ("Bank& Financial Fund"), Diamond Hill Short Term Fixed Income
Fund ("Fixed Income 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.
Except for the Fixed Income Fund and the Strategic Income Fund, the Funds'
investment objectives are to provide shareholders with long-term capital
appreciation. The investment objective of the Fixed Income Fund is to provide
total return consistent with current income and preservation of capital. The
investment objective of the Strategic Income Fund is to provide current income.
The Focus Fund pursues its objective by investing in common stocks that the
Fund's investment adviser believes are undervalued. The Fund normally focuses
its investments in a core of 20 to 30 companies. The Fund will from time to time
sell securities short. The Fund will not make a short sale if, immediately
before the transaction the market value of all securities sold short exceeds 35%
of the value of the Fund's net assets. The Small Cap Fund pursues its objective
by investing in common stocks that the Fund's investment adviser believes are
undervalued. The Fund normally invests at least 80% of its net assets in small
capitalization companies, defined as those companies with a market
capitalization below $2 billion or those companies included in the Russell 2000
Index. The Large Cap Fund pursues its objective by investing in common stocks
that the Fund's investment adviser believes are undervalued. The Fund normally
invests at least 80% of its assets in large capitalization companies, defined as
those companies with a market capitalization of $2 billion or greater or those
companies included in the Russell 1000 Index. The Bank & Financial Fund pursues
its objective by normally investing at least 80% of its assets in equity
securities of banks, lending institutions, and financial services companies
believed by the Fund's investment adviser to offer superior prospects for
long-term growth. The Fund will from time to time sell securities short. The
Fixed Income Fund pursues its objective by primarily investing in short-and
intermediate-term, investment grade debt securities. The Fund mainly invests in
mortgage-backed and asset-backed debt securities with short to intermediate
remaining maturities; short- and intermediate-term U.S. government and agency
debt obligations; and investment grade corporate debt securities (or unrated
debt securities which the Fund's investment adviser determines to be of
comparable quality) with short to intermediate remaining maturities. The
Strategic Income Fund pursues its objective by primarily investing in
income-producing securities including investment-grade corporate bonds,
preferred stocks of any market capitalization, non-investment grade corporate
bonds, real estate investment trusts ("REITs"), convertible preferred
income-producing securities, mortgage-backed securities, collateralized mortgage
obligations (CMOs), asset-backed securities and U.S. Government and agency
securities.
The Funds offer two classes of shares (Class A and Class C, except for the Fixed
Income Fund which offers Class A and Class I shares). The Class A and Class C
shares are subject to initial sales charges imposed at the time of purchase.
Certain redemptions of Class C shares made within one year of purchase are
subject to contingent deferred sales charges, in accordance with the Funds'
prospectus. Class I shares are not subject to a sales charge. Each class of
shares for each Fund has identical rights and privilege 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.
Income, expenses (other than expenses attributable to a specific class) and
realized and unrealized gains or losses on investments are allocated to each
class of shares based on its relative net assets.
Significant Accounting Policies
The following is a summary of the Funds' significant accounting policies:
Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States 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 revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Security valuation - The Funds' portfolio securities are valued as of the close
of the regular session of trading on the New York Stock Exchange (currently 4:00
p.m., Eastern time.) Securities which are traded on Securities which are traded
on stock exchanges or on the NASDAQ over-the-counter market are valued at the
last quoted sale price. Lacking a last sale price, a security is valued at its
highest bid price on such exchanges, or at the highest bid price in the over-
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31,2003 Page 41
Diamond Hill Funds
Notes to Financial Statements (Continued)
December 31,2003
the-counter market except when, in the investment adviser's opinion, the highest
bid price does not accurately reflect the current value of the security.
Securities quoted by NASDAQ are valued at the NASDAQ Official Closing Price. If
market prices are not available, or if an event occurs after the close of the
trading market (but before the Fund calculates its NAV) that materially affect
the values, assets may be valued at their fair value in accordance with
procedures adopted by the Board of Trustees.
Fixed-income securities generally are valued by using market quotations, but may
be valued on the basis of prices furnished by an independent pricing service
which uses prices based upon yields or prices of comparable securities,
indications as to values from dealers, and general market conditions, when the
investment adviser believes such prices accurately reflect the fair value of the
security.
Short-term investments in fixed-income securities with maturities of less than
sixty days when acquired, or which subsequently are within sixty days of
maturity, are valued by using the amortized cost method of valuation, which the
Board has determined represents fair value.
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.
Restricted cash - Cash received from short securities is maintained by brokers
and is used to meet margin requirements for short calls. It is included as
deposit with brokers for securities sold short on the statement 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. Repurchase
agreements are considered to be loans by the Fund under the 1940 Act.
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 outstanding shares of that class.
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 - The Funds will declare and pay, if any, all net
investment income, net long-term and net short-term capital gains on an annual
basis. Distributions to shareholders, which are determined in accordance with
income tax regulations.
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.
Security transactions - The Funds record security transactions on a trade date
basis. 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.
- --------------------------------------------------------------------------------
Page 42 Diamond Hill Funds Annual Report December 31,2003
Diamond Hill Funds
Notes to Financial Statements (Continued)
December 31,2003
Capital Share Transactions
Each Fund is authorized to issue an unlimited number of shares without par
value. Transactions in capital shares were as follows:
Focus Fund
---------------------------------------------------------
Class A Class C
--------------------------- ---------------------------
Year Year Year Year
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
Shares 2003 2002 2003 2002
--------------------------- ---------------------------
Issued 632,778 682,380 392,608 74,757
Redeemed (456,822) (507,244) (66,137) (51,882)
--------------------------- ---------------------------
Net increase in shares outstanding 175,956 175,136 326,471 22,875
Shares outstanding, beginning of year 1,204,771 1,029,635 230,187 207,312
--------------------------- ---------------------------
Shares outstanding, end of year 1,380,727 1,204,771 556,658 230,187
Small Cap Fund
---------------------------------------------------------
Class A Class C
--------------------------- ---------------------------
Year Year Year Year
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
Shares 2003 2002 2003 2002
--------------------------- ---------------------------
Issued 333,349 330,453 189,406 369,603
Reinvested 3,386 879 1,966 631
Redeemed (214,787) (177,365) (194,823) (33,449)
--------------------------- ---------------------------
Net increase (decrease) in shares
outstanding 121,948 153,967 (3,451) 336,785
Shares outstanding, beginning of year 586,614 432,647 441,900 105,115
--------------------------- ---------------------------
Shares outstanding, end of year 708,562 586,614 438,449 441,900
--------------------------- ---------------------------
Large Cap Fund
---------------------------------------------------------
Class A Class C
--------------------------- ---------------------------
Year Year Year Year
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
Shares 2003 2002 2003 2002
--------------------------- ---------------------------
Issued 312,773 241,284 90,686 8,280
Reinvested 2,457 5,096 30 253
Redeemed (112,141) (103,365) (38,871) (1,334)
--------------------------- ---------------------------
Net increase in shares outstanding 203,089 143,015 51,845 7,199
Shares outstanding, beginning of year 419,469 276,454 33,235 26,036
--------------------------- ---------------------------
Shares outstanding, end of year 622,558 419,469 85,080 33,235
--------------------------- ---------------------------
Bank & Financial Fund
---------------------------------------------------------
Class A Class C
--------------------------- ---------------------------
Year Year Year Year
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
Shares 2003 2002 2003 2002
--------------------------- ---------------------------
Issued 217,138 1,064,199 53,252 49,497
Reinvested 46,038 94,895 6,250 8,009
Redeemed (300,166) (1,354,052) (5,047) (7,480)
--------------------------- ---------------------------
Net increase (decrease) in shares
outstanding (36,990) (194,958) 54,455 50,026
Shares outstanding, beginning of year 732,406 927,364 59,076 9,050
--------------------------- ---------------------------
Shares outstanding, end of year 695,416 732,406 113,531 59,076
--------------------------- ---------------------------
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2003 Page 43
Diamond Hill Funds
Notes to Financial Statements (Continued)
December 31,2003
Short Term Fixed Income Fund
---------------------------------------------------------
Class A Class I
--------------------------- ---------------------------
Year Period Year Period
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
Shares 2003 2002/(A)/ 2003 2002/(A)/
--------------------------- ---------------------------
Issued 32,706 155,892 538,662 275,485
Reinvested 1,493 962 9,962 2,787
Redeemed (58,298) (85,526) (231,916) (39,414)
--------------------------- ---------------------------
Net increase (decrease) in shares
outstanding (24,099) 71,328 316,708 238,858
Shares outstanding, beginning of year 71,328 -- 238,858 --
--------------------------- ---------------------------
Shares outstanding, end of year 47,229 71,328 555,566 238,858
--------------------------- ---------------------------
/(A)/ Represents the period from June 28, 2002 through December 31, 2002.
Strategic Income Fund
---------------------------------------------------------
Class A Class C
--------------------------- ---------------------------
Year Period Year Period
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
Shares 2003 2002/(A)/ 2003 2002/(A)/
--------------------------- ---------------------------
Issued 1,304,876 206,511 738,922 9,061
Reinvested 56,609 2,014 12,951 31
Redeemed (17,303) (5,051) (33,010) --
--------------------------- ---------------------------
Net increase in shares outstanding 1,344,182 203,474 718,863 9,092
Shares outstanding,beginning of
period 203,474 -- 9,092 --
--------------------------- ---------------------------
Shares outstanding,end of period 1,547,656 203,474 727,955 9,092
--------------------------- ---------------------------
/(A)/ Represents the period from September 30, 2002 through December 31, 2002.
Investment Transactions
For the year ended December 31,2003,the purchases and sales of investment
securities (excluding short-term securities and U.S.government obligations) were
as follows:
- -------------------------------------------------------
Purchases Sales
- -------------------------------------------------------
Focus Fund $ 1,007,581 $1,458,917
- -------------------------------------------------------
Small Cap Fund $ 6,887,209 $6,548,966
- -------------------------------------------------------
Large Cap Fund $ 3,716,444 $4,459,860
- -------------------------------------------------------
Bank & Fianancial Fund $ 5,028,113 $7,116,321
- -------------------------------------------------------
Short Term Fixed Income Fund $ 5,340,612 $2,735,185
- -------------------------------------------------------
Strategic Income Fund $30,600,147 $9,508,613
- -------------------------------------------------------
Investment Advisory Fees and Other Transactions with Affiliates
The Focus Fund,Small Cap Fund,Large Cap Fund,Fixed Income Fund and Strategic
Income Fund each receive investment management and advisory services from
Diamond Hill Capital Management,Inc.("DHCMI") under management agreements that
provide for fees to be paid at an annual rate of 0.90%,0.80%,0.70%,0.30%,and
0.50% of the Funds' average daily net assets,respectively.The Bank & Financial
Fund receives investment management and advisory services from Diamond Hill
Securities,Inc.("DHSI") under a management agreement that provides for fees to
be paid at an annual rate of 1.00% of the Fund's average daily net assets.The
advisory agreements are subject to an annual approval by the Board. In
addition,each Fund has entered into an administrative services agreement whereby
DHCMI is paid a fee at an annual rate of 0.45% of the Funds' average daily net
assets.These administrative fees are used to pay most of the Funds' operating
expenses except dis-tribution, shareholder servicing, brokerage, taxes,
interest, fees, dividend expense on securities sold short and expenses of
non-interested person trustees and extraordinary expenses. For the year ended
December 31,2003,the investment advisers reimbursed $2,000 of trustee expenses
on behalf of each of the Focus Fund,Small Cap Fund,Large Cap Fund,Bank &
Financial Fund,Fixed Income Fund,and the Strategic Income Fund and will not seek
reimbursement from the Funds.
- --------------------------------------------------------------------------------
Page 44 Diamond Hill Funds Annual Report December 31, 2003
Diamond Hill Funds
Notes to Financial Statements (Continued)
December 31,2003
DHSI is a wholly-owned subsidiary of DHCMI, which is a wholly-owned subsidiary
of Diamond Hill Investment Group, Inc. DHSI is a full service NASD Broker-Dealer
and Registered Investment Adviser. For the year ended December 31, 2003, DHSI
did not receive any commissions from brokerage fees on executions of purchases
and sales of the Funds' portfolio investments.
Pursuant to rule 12b-1 of the 1940 Act, each Fund has adopted a distribution
plan (together, the "Plans"). Under the Plans, Class A shares pay quarterly a
distribution fee at an annual rate of 0.25% of Class A average daily net assets.
Class C shares pay quarterly 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. These fees, which totaled $241,364 for the year
ended December 31,2003, compensate DHSI (the "Distributor") for the services it
provides and for expenses borne by the Distributor under the Plans.
For the year ended December 31,2003, the Distributor received $4,822, $4,114, $
1,563, $3,224, $66, and $ 15,455 in sales commissions from the sales of Class A
shares of the Focus Fund, Small Cap Fund, Large Cap Fund, Bank & Financial Fund,
Short Term Fixed Income Fund, and Strategic Fund, respectively. The distributor
also received $3,083, $3,342, $526, $546, and $1,314 of contingent deferred
sales charges relating to redemptions of Class C shares of the Focus Fund, Small
Cap Fund, Large Cap Fund, Bank & Financial Fund, and Strategic Fund,
respectively.
DHCMI 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 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 DHCMI under
terms of the sub-administrative services agreements.
Federal Tax Information
The U.S. Federal income tax basis of the Funds' investments may differ from cost
for financial reporting purposes. These differences are due to losses recognized
for financial reporting purposes in excess of U.S. Federal income tax reporting.
As of December 31,2003, the aggregate total cost of investments for U.S. Federal
income tax purposes,gross unrealized appreciation (depreciation), and net
unrealized appreciation (depreciation) were as follows:
The tax character of distributions paid during 2002 and 2001 was as follows:
Focus Fund Small Cap Fund
-------------------------------
2003 2002 2003 2002
---- ---- ------- -------
Distributions paid from:
Ordinary income $-- $-- $98,800 $18,475
Long-term capital gains -- -- -- --
-------------------------------
Total distributions $-- $-- $98,800 $18,475
===============================
Large Cap Fund Bank & Financial Fund
-------------------------------------------
2003 2002 2003 2002
------- ------- ---------- ----------
Distributions paid from:
Ordinary income $26,642 $44,299 $ 39,852 $ 23,321
Long-term capital gains -- -- 985,424 1,518,162
-------------------------------------------
Total distributions $26,642 $44,299 $1,025,276 $1,541,483
===========================================
Short Term Strategic
Fixed Income Fund Income Fund
---------------------------------------
2003 2002 2003 2002
-------- ------- -------- -------
Distributions paid from:
Ordinary income $115,975 $51,622 $709,531 $28,379
Long-term gains -- -- -- --
---------------------------------------
Total distributions $115,975 $51,622 $709,531 $28,379
=======================================
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2003 Page 45
Diamond Hill Funds
Notes to Financial Statements (Continued)
December 31,2003
The following information is computed on a tax basis for each item as of
December 31,2003:
Focus Small Large
Fund Cap Fund Cap Fund
--------------------------------------
Federal tax cost $27,125,531 $13,801,652 $5,837,599
======================================
Gross unrealized appreciation $ 4,724,007 $ 5,170,099 $1,478,980
Gross unrealized depreciation (2,155,217) (108,558) (25,815)
--------------------------------------
Net unrealized appreciation (depreciation) 2,568,790 5,061,541 1,453,165
Post-October losses (1,083) -- --
Capital loss carryforwards (214,697) (146,303) (425,956)
--------------------------------------
Total accumulated earnings (deficit) $ 2,353,010 $ 4,915,238 $1,027,209
======================================
Short Term
Bank & Fixed Strategic
Financial Income Income
Fund Fund Fund
--------------------------------------
Federal tax cost $10,094,384 $5,959,641 $24,912,685
======================================
Gross unrealized appreciation $ 3445,617 $ 31,970 $ 969,921
Gross unrealized depreciation (14,054) (18,803) (65,049)
--------------------------------------
Net unrealized appreciation (depreciation) 3,431,563 13,167 904,872
Undistributed ordinary income 89,295 -- 354,087
Undistributed long-term gains 363,987 -- --
Post-October losses -- (12,861) --
Capital loss carryforwards -- (7,370) --
--------------------------------------
Total accumulated earnings (deficit) $ 3,884,845 $ (7,064) $ 1,258,959
======================================
As of December 31,2003, the Funds had the following capital loss carryforwards
for federal income tax purposes:
Fund Amount Expires December 31,
- --------------------------------------------------------------
Focus Fund $154,656 2009
60,041 2010
--------
$214,697
========
Small Cap Fund $146,303 2011
--------
Large Cap Fund $418,960 2010
6,996 2011
--------
$425,956
========
Short Term Fixed Income Fund $ 2,710 2010
4,660 2011
--------
$ 7,370
========
- --------------------------------------------------------------------------------
Page 46 Diamond Hill Funds Annual Report December 31, 2003
Diamond Hill Funds
Report of Independent Auditors
To the Shareholders and the Board of Trustees of the Diamond Hill Funds:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of the Diamond Hill Funds (comprising,
respectively, the Diamond Hill Bank and Financial Fund, Diamond Hill Focus Fund,
Diamond Hill Large Cap Fund, Diamond Hill Short Term Fixed Income Fund, Diamond
Hill Small Cap Fund, and Diamond Hill Strategic Income Fund) (collectively, "the
Funds") as of December 31, 2003, and the related statements of operations,
statements of changes in net assets and the financial highlights for the year
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 statements of changes in net assets and the financial highlights
presented herein for each of the respective periods ended December 31, 2002 were
audited by other auditors whose reports dated January 17, 2003 and March 20,
2001 expressed unqualified opinions on those statements of changes in net assets
and financial highlights.
We conducted our audits in accordance with auditing standards generally accepted
in the 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. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included
confirmation of securities owned as of December 31, 2003, by correspondence with
the custodian and brokers. An audit also includes assessing the accounting
principals used and significant estimates made by management, as well as
evaluation the overall financial statement presentation. 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 at December, 31, 2003, the results of their operations, the
changes in their net assets and their financial highlights for the year then
ended in conformity with accounting principals generally accepted in the United
States.
/s/ Ernst & Young LLP
Cincinnati, Ohio
February 2, 2004
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2003 Page 47
Diamond Hill Funds
CHANGE IN INDEPENDENT AUDITOR (Unaudited)
On November 20, 2003, Crowe, Chizek and Company LLP resigned as independent
auditor of the Diamond Hill Trust (the Trust), and Ernst & Young LLP (Ernst &
Young) was selected as the Trust's new independent auditor. The Trust's
selection of Ernst & Young as independent auditor was approved by the Trust's
Board of Trustees. Crowe, Chizek and Company's reports on the Trust's financial
statements for the fiscal year ended December 31, 2002 did not contain an
adverse opinion or a disclaimer of opinion, and were not modified or qualified
as to uncertainty, audit scope or accounting principles. During such fiscal
years, and through the date of Crowe, Chizek and Company's resignation, there
were no disagreements between the Trust and Crowe, Chizek and Company on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedures, which disagreements, if not resolved to the
satisfaction of Crowe, Chizek and Company, would have caused it to make
reference to the subject matter of the disagreements in connection with its
reports on the financial statements for such years.
- --------------------------------------------------------------------------------
Page 48 Diamond Hill Funds Annual Report December 31, 2003
Diamond Hill Funds
Management of the Trust (Unaudited)
Listed in the charts below is basic information regarding the Trustees and
officers of the Diamond Hill Funds (the "Trust".)
INTERESTED TRUSTEES:
- -------------------------------------------------------------------------------------------------------------------------
Number of
Portfolios in Other Trusteeships
Name/ Position(s) Term of Office/2/ Fund Complex Held by Trustee
Address/ Held with and Length of Principal Occupation(s) Overseen by Outside the Fund
Age Trust Time Served During Last 5 Years Trustee Complex
- -------------------------------------------------------------------------------------------------------------------------
William P.Zox,CFA/2/ Trustee Since August 2000 Investment Analyst with 6
375 North Front Street, Diamond Hill Capital
Suite 300 Management,Inc., since
Columbus,Ohio 43215 January 2001. Partner
Year of Birth: 1967 with Schottenstein,Zox
and Dunn Co., LPA, a law
firm, January 2000 to
December 2000.
- -------------------------------------------------------------------------------------------------------------------------
/1/ Each Trustee is elected to serve in accordance with the Articles of
Incorporation and Bylaws of the Trust until his or her successor is duly
elected and qualified.
/2/ Mr. Zox is an "interested person" of the Trust as defined in the Investment
Company Act of 1940, as amended, because of his relationship with Diamond
Hill Capital Management, Inc.
DISINTERESTED TRUSTEES:
- -----------------------------------------------------------------------------------------------------------------------------------
Number of
Portfolios in Other Trusteeships
Name/ Position(s) Term of Office/1/ Fund Complex Held by Trustee
Address/ Held with and Length of Principal Occupation(s) Overseen by Outside the Fund
Age Trust Time Served During Last 5 Years Trustee Complex
- -----------------------------------------------------------------------------------------------------------------------------------
John M. Bobb Trustee Since October 1997 Director of Headwaters 6 N/A
375 North Front Street, Group, a fine arts
Suite 300 consulting agency,1994
Columbus, Ohio 43215 to the present.
Year of Birth: 1941
George A. Skestos Trustee Since August 2000 President of Homewood 6 Director of the Midland Life
375 North Front Street, Corp., a real estate Insurance Co.
Suite 300 development firm, 1999
Columbus,Ohio 43215 to the present.
Year of Birth: 1968
Archie M. Griffin Trustee Since June 2001 President and CEO of 6 Director of Abercrombie &
375 North Front Street, The Ohio State Alumni Fitch. Director of Motorists
Suite 300 Association, Inc.,2004. Insurance. Director of the
Columbus, Ohio 43215 Associate Director of Ohio Auto Club.
Year of Birth: 1954 Athletics at The Ohio
State University, 1994
to 2003.
- -----------------------------------------------------------------------------------------------------------------------------------
/1/ Each Trustee is elected to serve in accordance with the Articles of
Incorporation and Bylaws of the Trust until his or her successor is duly
elected and qualified.
PRINCIPAL OFFICERS:
- --------------------------------------------------------------------------------------------------------------------------
Number of
Portfolios in Other Trusteeships
Name/ Position(s) Term of Office/2/ Fund Complex Held by Trustee
Address/ Held with and Length of Principal Occupation(s) Overseen by Outside the Fund
Age Trust Time Served During Last 5 Years Trustee Complex
- --------------------------------------------------------------------------------------------------------------------------
James F.Laird,Jr./2/ President, President Since May Chief Financial N/A N/A
375 North Front Street, Treasurer 2003; Treasurer Officer of Diamond
Suite 300 and and Secretary Since Hill Investment
Columbus, Ohio 43215 Secretary December Group, Inc., since
Year of Birth: 1957 2001 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.
- --------------------------------------------------------------------------------------------------------------------------
/1/ Each Trustee is elected to serve in accordance with the Articles of
Incorporation and By-Laws of the Trust until his or her successor is duly
elected and qualified.
/2/ Mr. Laird is an "interested person" of the Trust as defined in the
Investment Company Act of 1940, as amended, because of his relationship
with Diamond Hill Investment Group, Inc. and with Diamond Hill Securities.
The Statement of Additional Information contains additional information about
the Trustees and is available without charge upon request by calling
1-888-226-5595.
- --------------------------------------------------------------------------------
Diamond Hill Funds Annual Report December 31, 2003 Page 49
[This page has been left blank intentionally.]
- --------------------------------------------------------------------------------
Page 50 Diamond Hill Funds Annual Report December 31, 2003
[GRAPHIC]
[LOGO]
Diamond Hill Funds
375 North Front Street, Suite 300
Columbus, Ohio 43215
614.255.3333
www.diamond-hill.com
INVESTMENT ADVISERS:
Diamond Hill Capital Management, Inc.
Diamond Hill Securities, Inc.
DISTRIBUTOR
Diamond Hill Securities, Inc.
FOR ADDITIONAL
INFORMATION CALL:
Integrated Fund Services, Inc.
888.226.5595
This report must be preceded or accompanied by the Fund's prospectus, which
contains facts concerning its objectives and policies, management fees, expenses
and other information.The Statement of Additional Information (SAI) includes
supplementary information about the Fund's trustees and is available, without
charge, upon request by calling (614)255-3333.
Item 2. Code of Ethics.
As of the end of the period covered by this report, the registrant has adopted a
code of ethics that applies to the registrant's principal executive officer,
principal financial officer, principal accounting officer or controller, or
persons performing similar functions, regardless of whether these individuals
are employed by the registrant or a third party.
Item 3. Audit Committee Financial Expert.
The registrant's Board of Trustees has determined that the registrant does not
have an audit committee financial expert. The Trustees determined that no member
of the Audit Committee was qualified to be considered an audit committee
financial expert
Item 4. Principal Accountant Fees and Services.
December 31, December 31,
2003 2002
Audit Fees $ 50,000 $ 40,000
Audit-Related Fees 0 0
Tax Fees 7,500 3,000
All Other Fees 0 0
Item 5. Audit Committee of Listed Companies.
Not applicable.
Item 6. Reserved.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Funds.
Not applicable.
Item 8. Purchases of Equity Securities by Closed-End Funds.
Not applicable.
Item 9. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 10. 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), the registrant's principal executive officer and principal financial
officer have concluded that the registrant's disclosure controls and procedures
are effective as of a date within 90 days of the filing date of this report.
(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 11. Exhibits.
(a)(1) Code of Ethics identified in Item 2 of Form N-CSR are filed herewith.
(a)(2) Certifications required by Item 10(a) of Form N-CSR are filed herewith.
(b) Certifications required by Item 10(b) of Form N-CSR are 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, Jr.
- ----------------------------------------
James F. Laird, Jr.
President
Date: March 8, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)
/s/ James F. Laird, Jr.
- ----------------------------------------
James F. Laird, Jr.
President
Date: March 8, 2004
By (Signature and Title)
/s/ James F. Laird, Jr.
- ----------------------------------------
James F. Laird, Jr.
Treasurer and Chief Financial Officer
Date: March 8, 2004