Equity Philosophy & Process

Our investment philosophy

At Diamond Hill, we have consistently applied an intrinsic value investment philosophy since our founding. We seek to buy ownership stakes in businesses trading for less than what they are worth and wait for that value to be realized over time.

Under our intrinsic value philosophy, we:

Treat every investment as a partial ownership interest in that company
Always invest with a margin of safety
Possess a long-term temperament (five years or longer)
Recognize that market price and intrinsic value tend to converge in a reasonable time frame.

The definition of intrinsic value is straightforward — the discounted cash flows that can be taken out of a business over its lifetime. Math will always work, but the challenge is in estimating the timing and magnitude of expected cash flows over the life of an investment. In our view, implementing this philosophy successfully requires:

Understanding the economics of a business
Assessing the competitive advantages of the business and the structure of the industry in which it operates
Evaluating the evolving ways value can be created by a business
Having the discipline and patience to maintain a long-term time horizon.

Over the long-term, price and value converge. We believe the mismatch between our long-term focus and the shorter-term time horizon of many other investors (who drive market volatility by reacting to near-term news flow) is critical in identifying mispriced businesses and is a consistent source of investment opportunity for us.

We believe the price that you pay for a business is critical. Great businesses do not in and of themselves make great investments — as Warren Buffett has pointed out, “Price is what you pay; value is what you get.” We only purchase shares when they are available at a sufficient discount to our assessment of the intrinsic value.

“Intrinsic value focused investing is not the only path to attractive investment returns, but its combination of risk aversion and enduring logic make it a particularly attractive option — one that has stood the test of time and produced some of the industry’s great track records.”

—Austin Hawley, CFA, Portfolio Manager

Our investment process

Idea generation

Idea generation and independent thought are hallmarks of our approach. Investment ideas come directly from our portfolio managers and analysts who have followed companies and industries, in many cases, for decades. This experience gives our investment team members deep knowledge about companies’ competitive positions and appropriate valuation levels. We utilize the expertise of our portfolio managers and analysts to identify situations where we have a reason to believe that a business is mispriced.

Fundamental analysis

Our fundamental analysis includes digging into published financial statements and earnings transcripts. Company filings, such as 10-Ks and proxy statements, can produce insights into how a company thinks, its culture, its ownership structure, and the incentives of the management team. We read industry publications and attend conferences. We may talk directly with company management, with suppliers, with competitors — whatever helps us gain a thorough understanding of the key drivers of the business. We also evaluate each company within the context of the sector and industry in which it competes. We want to understand the competitive environment and things like relative pricing power, returns on capital, long-term capital flows into the sector and industry, regulatory limitations or opportunities, threats of technological obsolescence, among others.

As part of our fundamental analysis, we also seek to identify any potential risks to the business, including those related to ESG (environmental, social, governance). We do not exclude investments from our universe solely based on the presence of risk. Rather, we consider whether a risk is material and if it is reflected in the company’s valuation and the overall risk/return opportunity.

Estimating intrinsic value

After gaining a thorough understanding of the business, including all material risks and opportunities, we then conduct our own financial analysis. We estimate future earnings and cash flows over a long-term period, typically five years, then we estimate a terminal value (typically a price/earnings multiple) that we believe is most appropriate for a given company. We consider all material risks and apply a required rate of return based on the uncertainty of the cash flows. These inputs enable us to estimate intrinsic value using a discounted cash flow model.

If the current market price is at a sufficient discount to our estimate of intrinsic value, the stock would be eligible for portfolio inclusion. We update our models and intrinsic value estimates at least quarterly when earnings are released, or more frequently if warranted due to new information.

Portfolio construction

Portfolio managers for each strategy are responsible for buy and sell decisions and position sizing — consensus among co-portfolio managers is required on strategies with more than one manager.

The weight of an individual position is primarily driven by two things:

the discount to intrinsic value, and
the conviction in our estimate of intrinsic value.

Given our commitment to building high conviction portfolios, we are willing to take outsized positions in our best ideas and have exposure to sectors and industries that may differ materially from our benchmarks — including having no exposure to those in which we have not found attractive investment opportunities.

Sell discipline

We regularly compare current market prices to our estimates of intrinsic value and consider exiting positions under the following circumstances:

As the market price and our estimate of intrinsic value converge, we examine our model assumptions. If the fundamentals do not justify a change to our intrinsic value, we will exit our position.
If we refine our estimate of intrinsic value due to fundamental deterioration or no longer have confidence in our intrinsic value estimate, we will exit the position.
If we identify a more attractive investment opportunity.

“Our investment philosophy is simple — buy good businesses that we can understand and don’t pay too much.”

—Krishna Mohanraj, CFA, Portfolio Manager

Our investment team

We have a centralized team of research analysts who build a deep knowledge base and expertise in specific industries, sectors and countries around the world. Our team interacts daily to ensure efficient decision making and to avoid silos of information. The team meets monthly to discuss the market environment, company events, and relevant news. Our experienced equity research team is at the heart of our process, and the ideas our team generates are the foundation for building portfolios designed to outperform the market and peers over the long run.

Portfolio Guidelines

US Equity	Benchmark	Number of holdings	Maximum position size	% in top 10¹	Max industry/ sector²	Minimum Market cap.³	80% of portfolio market cap.⁴
Small Cap	Russell 2000	50–80	7%	>25%	20%/30%	$100MM	<$3B⁵
Small-Mid Cap (closed to most new investors)	Russell 2500	50–70	7%	>25%	20%/30%	$500MM	<$10B⁵
Mid Cap	Russell Midcap	40–60	7%	>25%	20%/30%	$1.5B	<$20B⁵
Large Cap	Russell 1000	40–60	7%	>30%	20%/30%	$2.5B	>$5B
Large Cap Concentrated	Russell 1000	20–23	10%	>50%	25%/35%	$15B	>$15B
Select	Russell 3000	20-30	10%	>40%	25%/35%	$500MM	N/A
Alternatives
Long-Short⁶	Russell 1000 60/40 Blended⁷	Long \| 40–60 Short \| 20–50	Long \| 7% Short \| 3%	>25%	20%/30%	Long \| $2.5B Short \| $1.0B	N/A
International Equity
International	MSCI ACWI ex USA	35-55	7%	>30%	25%/35%	$1.0B	N/A

Our shared investment principles

At Diamond Hill, our primary purpose is to improve our clients’ lives through better financial outcomes. That commitment is evident in our vision — to be an exceptional, active investment boutique that our clients trust to deliver excellent long-term investment outcomes from a team aligned with their success.

We believe these principles are foundational to who we are and how we serve clients, lead to excellent long-term investment results across multiple capabilities and promote enduring client relationships.

Our Shared Investment Principles

¹Percent of net assets. ²Net. ³At initial purchase. ⁴At cost. ⁵Or, if greater, the max market cap of companies generally within the cap range of the benchmark. ⁶Max short exposure 40%; max gross exposure 140%; typical net long range 40%–75%. ⁷The Blended Index represents a 60/40 weighted blend of the Russell 1000 Index and the Bloomberg US Treasury Bills 1-3 Month Index.

Margin of safety is a principle of investing in which an investor only purchases securities when their market price is significantly below their intrinsic value. In other words, when the market price of a security is significantly below your estimation of its intrinsic value, the difference is the margin of safety.

Carefully consider the Funds’ investment objectives, risks and expenses. This and other important information are contained in the Funds’ prospectus and summary prospectus, which are available at diamond-hill.com or calling 888.226.5595. Read carefully before investing. The Diamond Hill Funds are distributed by Foreside Financial Services, LLC (Member FINRA). Diamond Hill Capital Management, Inc., a registered investment adviser, serves as Investment Adviser to the Diamond Hill Funds and is paid a fee for its services.

Not FDIC insured | No bank guarantee | May lose value

Risk disclosures: Small- and mid-capitalization issues tend to be more volatile and less liquid than large-capitalization issues. Overall equity market risks may affect the portfolios’ values. Because the portfolio holds a limited number of securities, a decline in the value of these investments may affect overall performance to a greater degree than a less concentrated portfolio. International investments involve special risks, including currency fluctuation, lower liquidity, different accounting methods, tax policies, political systems and higher transaction costs. These risks are typically greater in emerging markets. The Long-Short Fund uses short selling, which incurs significant additional risk. Theoretically, stocks sold short have the risk of unlimited losses.

Russell 3000 Index measures the performance of roughly 3,000 of the largest US companies. Russell 1000 Index measures the performance of roughly 1,000 US largecap companies. Russell Midcap Index measures the performance of roughly 800 US mid-cap companies. Russell 2500 Index measures the performance of roughly 2,500 US small- to mid-cap companies. Russell 2000 Index measures the performance of roughly 2,000 US small-cap companies. MSCI ACWI ex USA Index measures the performance of large- and mid-cap stocks in developed (excluding the US) and emerging markets. Long-Short Fund Blended Index represents a 60/40 weighted blend of the Russell 1000 Index and the Bloomberg US Treasury Bills 1-3 Month Index. The Russell 1000 Index measures the performance of roughly 1,000 US large-cap companies. The Bloomberg US Treasury Bills 1-3 Month Index measures the performance of US Treasury bills with time to maturity between 1 and 3 months. The index(es) are unmanaged, market capitalization weighted, include net reinvested dividends, do not reflect fees or expenses (which would lower the return) and are not available for direct investment. See diamond-hill.com/disclosures a full copy of the disclaimer.