Earnings Transcript for DHIL - Q1 Fiscal Year 2013

Operator: Welcome to Diamond Hill First Quarter 2013 Portfolio Manager Conference Call. My name is Allen and I will be your operator for today’s call. (Operator Instructions) Please note this conference is being recorded. I would now turn the call over to Julie McConnell. Ms. McConnell, you may begin.

Julie McConnell: Great. Thanks Allen. Good afternoon everyone and welcome to the Diamond Hill first quarter portfolio manager conference call. We certainly thank you for all for joining us this afternoon. Like Allen mentioned, my name is Julie McConnell and I will be moderating the call today. To start our call this afternoon, Igor Golalic who was one of our research analysts will discuss the current environment in the healthcare industry and also discuss the relative attractiveness of this sector. Igor’s comments will be followed by our portfolio manager reviews of all of our strategies. Each portfolio manager will go into detail about his respective strategy. But I will just mention that we are very pleased to report what was a very strong quarter in that all of our funds exceeded their benchmarks. And in addition, Diamond Hill crossed $10 billion in assets under management for the first time in January. So we really appreciate all of your support in helping our firm reach this important milestone. After our portfolio managers review their strategies we will open the call for a question and answer session. At that time the operator will provide instructions if you’d like to ask a question over the phone or you can also type your question on the screen any time during the call and all of our portfolio managers as well as Igor will be available to answer any questions you may have. As always, there are few important compliance statements to go over before we begin. The opinions expressed by portfolio managers are their own and are subject to change at any time as circumstances change. Any discussion of specific portfolio holdings will be as of March 31, 2013. Portfolio holdings are subject to change without notice and finally, a complete list of portfolio holdings as of March 31 is available on our website. The next two slides provide additional important disclosures and we would just ask that you review these at your convenience. So with that, I will go ahead and turn the call over to Igor who again is going to provide his thoughts on the healthcare industry.

Igor Golalic: Thank you, Julie very much. My name is Igor Golalic. I am a member of the healthcare team at Diamond Hill. I am going to try to, in the next five to six minutes, give you an overview of the sector and sort of tell you how we got to the point where we are today and sort of where the sector is heading going forward. And I will try to wrap it up with our positioning and discuss how we (inaudible) portfolio at the moment. Healthcare reform was announced a couple years ago but officially signed into law (inaudible) summer of last year when the US Supreme Court gave it a green light. It was sort of a perfect storm of sort that forced the sector into the growth areas of public policy initiatives and debates over the last couple of years. If you look at the slide seven you will see that we witnessed steep annual price increases for healthcare premiums over the last decade or so. It’s come down partially for cyclical reasons but generally they have been higher in other consumer and producer pricing as you’ve seen. We’ve also seen a growing share of deductibles and finally increasing share of public spending that's gone on to healthcare almost every dollar in the economy. At this point it’s going to healthcare. This has sort of forced the debate around the sector in terms of what should be done to try to give it a more sustainability long term. If you move further – on the slide eight and sort of look at the aggregate level of spending in the sector and compare that to sort of what is being spent on healthcare elsewhere in the world. Certainly U.S. spent the most and the performance of the reform has argued that we also look at sort of how we’re spending the money and where the money is going. Slide number nine, you will see – I’ve kind of put together just some of the higher ticket items in the healthcare sector, your MRI exams, your CT scans, coronary bypass surgeries, things of that nature, so you can sort of get a feel for the level of intensity in the sector. It’s not just the pricing we’re talking about, we are also talking about a high level of intensity in usage, high level of volumes in the sector that’s relatively to other countries in the world. Certainly that will be okay and there is nothing wrong with that, it is clearly warranted if it resulted in better outcomes. Now if we turn to slide 10, again performance of the reform we’ve talked about that when you look at U.S. healthcare system and evaluate it across several aspects, things like quality access, efficiency and ultimately life expectancy as well in the form of sort of an outcome. You can see that U.S. when it’s compared with immediate years expenses and any question out of it, so that’s how we got to where we are today. I If we turn to slide 11, we got Patient Protection Affordable Care Act, also known as the Affordable Care Act or Obama Care and the law certainly has issues with it but I think on balance it tries to move the sector in the directions of focusing more on outcomes and more on value delivering quality and value rather than sort of being obsessed with volume. So the law tries to emphasize preventative care, growing disease management by some accounts, it’s almost 70% of world healthcare spending. At the same time there is a significant change in the payment mechanism for providers. So your hospitals will no longer get reimbursed for seeing the same patients twice within a relatively short time span. They’ll essentially have three dress code -- if they don't try to figure out how to provide proper care, it’s going to affect their bottom line. Managed-care companies on the other hand have to rethink their business models. The healthcare is being used as I think as people to spear, the profitability is being kept and they are being forced to look at other sources of income. So they started to partner with providers and there’s just blurring of lines between the two and involving the efforts to share that – you can share the payment specifically for Medicare, sometime for Medicare and Medicaid. So there is a carrot and stick approach in here because the larger sphere is setting the rules and the sector started to listen to sort of what domestic is. On slide 12, I’ve tried to put together some of the aspects of the healthcare system that I think were deemed valuable in the past that going forward will no longer be looked at that way. And so when you try to figure out what will be valuable going forward and how you want to be in position your business model and what companies you want to look at, the thing that the key tenet of the law is focus on quality and value sort of in the middle of the page versus volumes on the other hand that will tell you we’re doing things. What that leads to is sort of increased level of transparency, increased level of coordinated care or these are care organization, to give access to consumer to maybe have some input, have some toward as well, most importantly preclinical evidence as opposed to your key opinion leaders will drive how care is being delivered in the future. So on balance I think it does look like it should move the factor toward delivering more value. On slide 13, when you look at how stocks and how the sector has performed, as the law became more of a certainty the sector has re-rated and we sort of see sustainability in terms of cash flow, in terms of dividend, which attracted investors especially return on equity which has stabilized over the last four to five years. And now I think the important dynamic to notice here is while the sector has deteriorated for the first time and the long-time investors are willing to pay a premium relative to the market to own the sector and to own stocks in there. So think from that standpoint, I am looking at slide 14, it’s critical for us to try to figure out that the dynamic that will sort of evaluate starts narrowing, has really made the sector little bit riskier going forward. The nature of the upside in terms of performance will probably be earnings driven, and so on the margin we have looked at sort of license explosion I believe that some of the names were – will either reduce the weighting (inaudible) positions. In terms of looking at new opportunities along the line of what I have discussed, we are looking at companies that are really not being rewarded for doing some strategic long-term investment that will fit well within the paradigm and the world. At the same time maybe looking at companies that are willing to stop the market through innovation, maybe bringing the medical device is going to sort of change status quo and coming to the lower price point. On the short side, you have this vacuum through this end of this year and going into 2014, companies – certain companies may try to take advantage of that short-term profitability in regions and (inaudible) long-term investment that they need, they’re sort of looking there to find (inaudible). And finally on page 15, slide 15, just sort of give you a breakdown of the names that we know. I think I have tried to classify it in here in terms of how they responded to maybe what the law brings with it, so companies like Abbott, like Pfizer, like Teva, United Healthcare, they are rethinking their business models and maybe doing some strategic initiatives to sort of align themselves with some of the aspects of the law. Similarly you have companies that have assets that will be valuable under the new paradigm, companies in the diagnostic space, companies in the genome sequencing space. And there is a third group of companies that have finally embraced the concept of value, just specifically on the medical device side where they used to incrementally price product little bit higher without delivering value to (inaudible) on disruptive technologies and bringing some of the product to market with it really valuable to the patient. We do have some position in what I would call deeper discount and discount intrinsic value efficiently sort of with (inaudible) demand not necessarily categorizing them in either three categories. So that’s it for me, and now I will turn it back to you, Julie and if there are any questions, I will take them with.

Julie McConnell: Great, thanks Igor. So we will now turn to our strategy update and to get us started, Tom Schindler will provide an update on the small cap strategy.

Tom Schindler: Thank you, Julie. The Diamond Hill Small Cap Fund Class I returned 16.5% during the quarter compared to 12.4% for the Russell 2000, a difference of about 415 basis points. The trailing one-year return of 20.36% is about a positive 400 basis point spread versus the Russell 2000. The three year annualized return of 12.1% trailed the Russell 2000 by 135 basis points annualized. Five-year return annualized of 8.2% is about in line with the Russell 2000 Index and the 10-year annualized return of 13.8% is about 230 basis points ahead of Russell 2000 Index. Looking at the five-year risk statistics, it’s very similar to past quarters. Looking at portfolio statistics, there are two things that stand out. The first, the portfolio turnover rate did tick up this quarter to a more normalized 26% on a trailing 12 month basis. Last quarter this was reported as 13% and the percent of net assets and cash was up to 15% at quarter end, up from 10% at year-end. Looking at the sector allocations, the major sectors that were down in the quarter from previous quarter end were financials where significant reductions in Assured Guaranty and (inaudible), industrials where there were significant reductions in the positions, (inaudible) and consumer staples where there were reductions in the Energizer, (inaudible). Most of those have gone into raising the sector allocation with cash. Looking at top 10 holdings, there has been some shuffling as a result of relative performance as well as some additions and deletions. Following out of the top 10 holdings were Kennametal, Berry and Old Republic all due to reductions in the position sizes. Joining the list were (inaudible) and Simrex (ph) which were next in line. In addition, we substantially reduced some of the top 10 holdings particularly Assured Guaranty, Energizer and as I mentioned Kennametal, Berry and Old Republic. There is a long list of new and eliminated positions. I’ll try to just summarize a couple. Rosetta Resources in some respects that took place -- Rosetta in the past has focused on the Eagle Ford shale but just after we bought it, they also did an acquisition of $700 million plus of Permian Basin assets from Comstock Resources. Warner Chilcott is a branded pharmaceutical maker that focuses on women’s health and gastroenterology. TriMas is a diversified industrial company, and we have several new insurance companies some of which are in reinsurance, including Reinsurance Group of America and Greenlight Capital. Eliminated positions by and large were all small positions that had been reduced in previous quarters and so the elimination represents a final portion of the stock that we still own in the portfolio. Turning to best and worst performers, the best performers generally were those that were large weights in this well. I will make a couple of special notes. Assured Guaranty during the quarter, Moody’s did downgrade them. That was review process that had been ongoing since last March. So a negative outcome and yet in spite of this downgrade, the stock rallied significantly from the 14th level up to 20 plus and in light of that price movement we reduced the position size. But one positive development during the quarter was a judge rule in their favor in a case against Flagstar over reps and warranties. That award was $90 million but also decided in their favor which will perhaps for other counterparties to come to settlement first. Berry Petroleum during the quarter agreed to be bought by Linn Energy. It’s an all-stock deal. I anticipate not owning Linn Energy going forward. The worst performers, there were no real standouts. We did buyback some liquidity services during the quarter. This is our second time owning it. Subsequent to our purchase the stock has dropped and we’ve added to our – subsequent to our purchase, the stock has dropped and we’ve added to our purchase. The second note on Myriad Genetics, there is ongoing Supreme Court case to decide the enforceability of some of the existing pattern positive outcome by the -- decision by Supreme Court and we would see upside to the stock, a negative decision in their potential downside. The position has been reduced, we still own about 1.4% position. With that, I will turn it back to Julie.

Julie McConnell: Great, thanks Tom. And next we will hear from Chris Welch to comment on the small-mid cap strategy.

Chris Welch: Thanks Julie. The small mid-cap strategy was up 16.5% in the first quarter and that exceeded the 12.85% return of the benchmark Russell 2500 Index. Over a longer period of time the strategy is roughly in line slightly behind the benchmark for three-year performance over five years and since inception which is now7.25 years, the strategy is ahead of the benchmark. Looking at the next slide, foreclosure statistics, on the lower left there, the turnover rate of 32% that is fairly consistent with what the turnover has been for the past two or three years after having a very elevated levels of turnover during the financial crisis. It’s been towards that lower end of the 30% to 50% turnover range outside of this sort of expectation over time. In terms of sector allocation, there have been some changes over the past quarter and year. I will highlight a few of those. Financials is up a little over two percentage points from the end of the year and up about 3.5 percentage points from a year ago. And consumer discretionary is up about the same amount about two percentage points from last quarter and 3.5 percentage points from last year. On the negative side, industrials was reduced between two and three percentage points both on a quarter over quarter and year-over-year basis, and energy is down 160 basis points from 11% at the end of the year and over four percentage points from the end the first quarter 2012. So the energy weighed at about 9.5% of the portfolio, it’s the lowest weight that we’ve had in energy since the inception of this mid strategy. And cash level of 8.7% is modestly up from the end of the year and slightly down from what it was a year ago. Looking at the top 10 in the new and eliminated positions. No major changes in the top 10 holdings. On the new positions all four of these were also bought in the small cap strategy, so there is overlap there, the reinsurance company that Tom referred to as well as Orthofix -- orthopaedics and spinal stimulation company. Igor talked about the healthcare outlook and Orthofix is one that we think is just what’s very attractive on a price basis. They got a very clean balance sheet and awesome opportunity there. One thing I will mention with those new positions is all of our new positions that we bought during the quarter were below $5 billion in market cap, two of them were below $1 billion in market cap. We have been for the past two or three years finding the best opportunities at the higher-end of the market cap scale. And I will still say that describes our overall positioning in this mid strategy but our new positions this quarter were a little bit more towards the lower end. On the eliminated positions I will just highlight the top three there. Alaska Air Group was a stock that we bought a couple years ago. We added to the position back last September, and we eliminated the stock at a 75% gain from where it was trading last September when we added to it. So it’s been a very positive strong performer partially due to the consolidation in the airline industry and also just a strongly managed company. Berry Petroleum Tom made reference to the acquisition of Berry Petroleum by Linn Energy, and we completely sold out of that position during the quarter. And then HollyFrontier is a refining company that we bought in the fourth quarter of 2012 and that they just played out very quickly. We got very attractive gains in the stock and eliminated that position. The final three were just eliminated on strength that they approached to reach our income to value estimate. Then finally on the best and worst performers, I will highlight a couple of these. Southwest Airlines was up 31% over 30% in the first quarter benefiting from industry consolidation as well as cost savings from the AirTran merger which they closed a couple years ago. ConAgra Foods completed the Ralcorp acquisition and started getting some benefit from that. Boston Scientific saw some stabilization in their core business and along with their favorable new product outlook the stock had over 35% gain in the quarter. On the negative side, Quest Diagnostics is facing some government pricing pressure and also some competition from hospital labs, so that hurt them. And Juniper Networks, there has been some concerns about telecommunications carrier spending and also some concerns about a competitive new product that one of the competitors came out with. So that stock was down in the single digits during the quarter. So with that, I will turn it back to Julie.

Julie McConnell: Great, thanks Chris. Next we will turn the call to Chuck Bath for an update on the large cap strategy.

Chuck Bath: Yes, thanks Julie. For the first quarter the large-cap bond was up – just a little over 11.5% compared to 11% for the Russell 1000 Index and for the one year period as well through the months that exceeded the benchmark. About 3 and 5 years its trail significantly exceeded 10-year benchmark and since inception which (inaudible) well ahead of its benchmark. In terms of the portfolio there has been a reasonable amount of change recently, so I thought I’d review it. The financial services sector has increased in weight in the portfolio. We’ve found several names in the last two quarters, it seems we have meaningful discounts to its intrinsic value in part due to what I feel is a residual discount these shares sell out due to the negative goodwill developed out of the financial services crisis of the 2008-09. But for the most part those issues are behind us. The balance sheets have been rebuilt. Fundamental conditions have improved and I think there is reason or hope to see that fundamental improvement -- fundamentals will get better still. So there has been some new names in the portfolio and I will get to that but the sector is now about the 25% of the portfolio and several are the top 10 holdings are financial services names. Another large area is consumer stable, it’s probably the most meaningfully overweight in the portfolio and it’s been that way for a while. I guess one other area that Chris mentioned in his mid-fund, energy while it is probably underweight is in fact underweight in the portfolio and I can't remember the last time this portfolio has been underweight energy probably going back to 2003. So that represents sort of changes in fundamentals there as well as some names like HollyFrontier and Exxon Mobil, they reach our intrinsic value are very close to it, we seek to reduce elsewhere. And then information technology is still underweight but it’s probably could go up – it has gone up a little bit relative to its index. As I mentioned in terms of new positions of the portfolio and -- technology name Apple was added to the portfolio subsequent to its quarterly announcement in – after the first quarter earnings were announced. But the balance sheet is pristine, its competitive position is outstanding and the valuation is very cheap. So we established what for us right now for company the size it’s a small holding in the portfolio but if we get comfortable, we will make to some more noble size position. Morgan Stanley is the largest new name of the portfolio which I discussed, the financial services company, reflective of combination of big discount and improving fundamentals. And then Phillip Morris International and r Express Scripts are both positions which are established with this weight now but I am looking for opportune time to take them up to more normal weight into the portfolio. Eliminated positions, little bit more trading in the portfolio than usual. I mentioned Exxon and HollyFrontier – HollyFrontier quite frankly reached our estimated intrinsic value in a very short period of time and the stock did very well but it was eliminated. Exxon, I am a little bit concerned about slowdown in free cash flow generation and in volume. We have seen some negative volume growth for Exxon that was a bit unusual. So the fundamentals which I followed and been so enamored with for so long are no longer in place there. So I felt that it was – especially the stock trades close to intrinsic value, the proceeds could be used elsewhere. And then basically the rest of these names, Johnson & Johnson, PPG and Travelers companies reached our estimated intrinsic value. As the market has gone up we have had more stock reach our estimate which has created more portfolio turnover in the portfolio. That’s okay. But it may not be reflective of what is the normal level of portfolio turnover, they rise and the market continues. In terms of the top 10 holdings, Medtronic now the largest holding the portfolio and you see several of the financials that are – it was why this 25% sector weighting but Hartford, Citigroup, AIG, JP Morgan, as you notice same is under top 10 but it’s close. The best performing names in the portfolio, f United Technologies, ConAgra, Pfizer, a lot of the more stable healthcare and consumer staples name, the best in the quarter, especially towards the end of the quarter and they drove the performance. In terms of the worst performers, I think I will pass on Juniper and Quest because Chris Welch described so. Then a couple of new names in the portfolio, Apple and Express Scripts, they are – because they are new names in the portfolio they weren’t necessarily helping the entire time period. So their performance that may not be representative of how the level of stock did in the quarter but Apple did perform quarter to quarter. But we didn't first until sort of halfway through the quarter. And then finally, Apache which is energy company which has been continued to disappoint in terms of capital allocation and production growth. VeriSign and I think the management they are more focused on that, it should be more friendly to shareholders going forward. I think that concludes of the key points I want to make regarding the portfolio and the changes in the portfolio. So with that, I will return it to Julie.

Julie McConnell: Great. Thanks Chuck. And next we have Bill Dierker and Austin Hawley who are co-portfolio managers for our select strategy.

Bill Dierker: Thank you, Julie. As you can see on page 33 that the select fund had a good first quarter outperforming the benchmark by 14.67% versus 11.07%. That also carried over to improve the one-year number. The five-year number we've made progress on that. We reduced the gap between the fund and the benchmark by 19 basis points in the first quarter. And on the next slide the only thing I would draw to your attention is the turnover rate which is 60% which is much larger than I'm usually coming in. But I think most of that the turnover was basically selling stocks that are approaching intrinsic – we’re selling stocks that were approaching their idea or selling positions for better ideas. We had three buys and 13 buys and 13 sales in the last fourth quarter and I think that is the driver of that the turnover rate. With that, I am going to turn the rest of the presentation over to one of my co-managers Austin Hawley for the rest of the presentation.

Austin Hawley: As Bill mentioned, we had higher than normal activity in the select fund during the quarter. Several of our holdings approached our estimate of intrinsic value and we were also able to identify handful of attractive new ideas across a variety of sectors and market caps. Looking at the top 10 holdings for the fund and there were three new names during the quarter. Medtronic which was in addition to an existing position in the fund, IBM which moved into the top 10 as a result of relative price-performance and Morgan Stanley which is a new position for the fund. These three names reflect financial holdings, Assured Guaranty, Charles Schwab, and Wells Fargo. Assured Guaranty and Schwab were trimmed as their prices appreciated during the quarter. Wells Fargo was eliminated from the fund to help fund new positions and Popular and Morgan Stanley and also to increase our weight in iStar Financial. Morgan Stanley as you see is needed a top 10 holding in the fund. We purchased Morgan Stanley below tangible book value of valuation that we do not think adequately reflects the improved capital level of the firm and also an evolving business mix that we increasingly weighted towards more profitable wealth management and advisory segments. Looking at other new additions to the fund during the quarter, we added a position in Popular which is the largest bank in Puerto Rico. Popular has approximate 40% of deposits on the island. Over the past couple of years Popular has had elevated credit costs stemming from the financial crisis and also weak Puerto Rican economy. Recently those costs have started to decline and the company has very strong capital levels. We think Popular is extremely cheap when thinking about normalized level of credit cost and normalized earnings. As Chuck mentioned, we also added Apple to the fund during the quarter. I won’t add any additional comments there. The next three names on the list Ralcorp, Fort Labs and Aaron are all names that have been held in other strategies over the past few years. Short-term concerns about these companies’ prospects during the quarter allowed us to purchase at attractive prices. Finally, not listed here we also took a position in Radiant during the quarter, the mortgage insurer that was also listed for small cap in this list. We initially ultimate bought a 1% position in the fund, and we have increased that position over time. However Radiant appreciated very substantially shortly after we repurchased it and we ended up exiting that position and helping to fund a larger position in Aaron’s. Looking at the eliminated positions, Energizer Holdings, HollyFrontier and Johnson & Johnson were all eliminated as they reach our estimate for intrinsic value. Assured, Assured, Cisco and Wells Fargo were sold to purchase companies that we felt were creating at larger discounts to intrinsic value. Turning to slide 36 and looking at the best and worst performers, there were no significant detractors during the quarter. Looking at the best performers I think most of the names have already been mentioned, I'll quickly highlight Charles Schwab which I don’t think was on any of the other list. Charles Schwab continues to report record levels of asset gathering driven partly by the rollout of several products and product platforms. And with that, I will turn it back to Julie.

Julie McConnell: Thank you, Bill and Austin. And next Ric Dillon, co-portfolio manager for our long-short strategy will provide an update on recent proposal.

Ric Dillon: Thank you, Julie. As you’ve heard from the previous portfolio managers, similar to other strategies the long-short strategy had a good quarter. Being in a long short strategy we wouldn’t expect to keep up with a long only benchmark like the Russell 1000 in total for such a short period of time. However our goal over a long period of time is provide that long only benchmark with a lot less risk. All of the positive results are explained by the long portfolio naturally. And if you turn to slide 39 you'll see our net exposure at the end of the quarter was 62%. That exposure was the highest 75, 74% I think on September 30, 2011. And so fortunately we were at our sort of high-end of our range and as the market has appreciated the last 18 months, we have sort of sold into the strength and we’re now down to 62% closer to the middle of our 40% to 75% typical range. The financials are our largest exposure like our other strategies as probably in later Chris Bingaman will talk in detail about financials but as you heard already this is the area that we think is most attractive in the US markets. Turning to slide 49 you'll see four of our top-five holdings are financials surprisingly. Now on the short side, we continue to be cautious on the US consumer, and you see three of our top-five short positions are consumer discretionary companies. New positions added, you’ve heard Morgan Stanley and Popular mention, both financial names Chris Bingaman, he brought into the portfolio. On the short side we added several new names in the portfolio, and on the eliminated side, we eliminated – on the short position MBIA it's a beneficiary of some of the same fundamentals that help our long provision is Assured Guaranty. And so for that reason we decided to exit that position. And finally on slide 41 against and the risk of redundancy, the best performers were led by financials. And not surprisingly in a strong market long position really didn't hurt us at all in any way shape or form. We did have four – have three short positions that were considerably against us. Campbell Soup has been a good performer over the last couple of quarters as investors have flocked to the consumer staples, highest dividend paying companies, that Campbell Soup would be one of them. Brunswick is another company in the consumer discretionary area that performed well for the quarter. However some of data that’s come out toward the end of that quarter and since the end of that quarter support our short thesis there. And finally as we’ve had exposure to the Russell 2000 which in our view is the most challenged part of the market and of course being small cap in the difficult tomorrow, we have our position but in that quarter it did hurt us by 20 basis points. So with that, I will turn it back to Julie.

Julie McConnell: Thanks Ric. And next we will hear from Chris Bingaman with an update on our financial long short strategy.

Chris Bingaman: Thanks Julie. Just going to spend a minute or two on this – the financial fund at a good, not surprisingly as you’ve heard good quarter, Class I shares were up about 14.5% versus I guess 11.75% for the S&P 1500. Cap weighted indices, again similar to be the diversified long short fund net exposure down during the quarter, I guess not surprisingly as a lot of these stocks performed very, very well especially since the fall of 2011 market low in late September, early October. Also I think we paced in the mid-80s in terms of our net exposure then and we are now down into the -- below 75 now. So long exposure down, short exposure up and net was down I think 7.5% quarter to quarter to 74. Most of the reduction is coming out of the insurance and banking industries within the sector. On page 45 top holdings, little bit of turnover, Assured Guaranty has been mentioned numerous times and Wells Fargo, those positions is as the discounts narrowed fairly substantially and Istar and Popular appreciated nicely very substantially really during the quarter and relative performance pushed them into the top five. On the short side, principal financial, a name that we have been in and out in the past since we have established is a 1% position. Other new positions I think have generally been mentioned in eliminations as well. Most of those performing reasonably well and getting close to our estimate of intrinsic value and very small positions generally speaking at elimination. Same thing, best performers, if I go through all these, it’s going to be largely redundant I think what we have already heard. So I will leave it there and turn it back to July and I am glade to answer questions later.

Julie McConnell: Thanks Chris. And next we will hear from Rick Snowdon with an update on our research opportunity strategy.

Rick Snowdon: Thanks Julie. In the first quarter of the class our shares of the research opportunity fund returned 12.96% versus 11.07% for Russell 3000. Since inception four years ago, research opportunities have generated strong absolute returns with an average net exposure of 69%. But during this strong period for equities the fund has modestly trail along on the benchmark. Over four market cycle however we expect to have value relevant to our path of long only benchmark. Now turning to the next page, number of long names into the portfolio decreased 62 from 65 a quarter ago. Number of short names increased to 20 from 12. Consequently our net exposure declined to 67% from 78%. In terms of sector allocation, the financial sector continues to represent our largest long exposure, consumer discretionary represents our largest short exposure. No significant change, sector weights in the quarter was within the industrial sector, declining on the long side for roughly 400 basis points from 14.5% to 10.5% due to the elimination of the airline holdings. Turning to next page, our top 10 holdings are fairly consistent in the last quarter and with change being Assured Guaranty was replaced by IStar Financial, this was caused by turning the Assured position based upon it having appreciated towards estimate of intrinsic value. During the quarter we had 8 new names, AIG, Dollar General, discount retailer, United Health, the health insurer which has been owned elsewhere (inaudible) and five of the names have already been mentioned, the new ones were Aaron’s, Orthofix, First American, Principal Financial and Warner Chilcott. In terms of eliminations during the quarter we eliminated 8 names, Alaska Air, Leisure Travel, Hi-Tech HiTech Pharma, HollyFrontier, Imax, Medtronic, Redwood Trust and Excel Group. The hope of Medtronic remains appreciated considerably toward our estimate of intrinsic value. Medtronic was eliminated to freed up capital for other opportunities in the healthcare team. Turning to next page, focus on one top performer and one poor performer, I think the long top performers have already each been addressed, so I will talk about Occupy which is one of my -- short holding stock sold off after earnings and after analyst day, meeting its (inaudible) largely to some kind of pressure due to increased operating expenses for (inaudible). In terms of the bottom performer I mention financial services, assist corporations and government entities in the disposal and monetization of surplus scrap inventory. The company reported in line earnings but 13 times was below expectations, as well as below previously issued guidance. Despite this near term softness the analysts companies name, at least the company is strong with opportunities and the stock is undervalued relative to its intrinsic value. With that, I will hand back over to you.

Julie McConnell: Great, thanks Rick. To wrap our strategy update this afternoon we will hear from Bill Zox for an update on our strategic income strategies.

Bill Zox: Thanks Julie. For the quarter the fund was up 1.57% that compares to a positive 0.6% total return for our primary benchmark which is the Merrill Lynch US corporate and high-yield index and negative 0.14% for the secondary benchmark which is the broad Merrill Lynch US corporate government mortgage index. For the trailing five year period the fund generated total return of 8.74% per year compared to 8.43% for our primary benchmark and 5.48% for our secondary benchmark. I’ve added a new slide to this quarter. The fund was moved from the MorningStar multisector bond category to the MorningStar high-yield bond category in January. As most of you know, we do not manage the fund against the high-yield index or any other index. In fact, 30% of the fund is in investment grade corporate bonds as of the end of the quarter and our duration is about that of the high-yield index. Instead we manage the fund against our primary objective of generating a cash distribution and total return of inflation plus 3% over rolling five-year periods while minimizing the risk of a negative real return. Therefore to compare the performance of the fund to other fixed income funds it is important to risk-adjust the returns. As unleveraged investors with the five-year time horizon we are not focused on shorter term volatility, but standard deviation and short ratio are the most common quantitative measures of risk and risk-adjusted returns. At a minimum this data shows that the risk profile of the fund is much lower than that of the high-yield category and our returns relative to our volatility at a much higher than the category average. Turning to the next page. I'll just highlight that the duration of the fund is 2.14 based on spreads which are now below average and median levels, I should say high-yield spreads which are below historic average and median level and absolute yields which are at historic lows. In fact, yields are worst on the high-yield index at 5% currently. That compares to over 10% yield the worst at the beginning of the fourth quarter 2011. That dictates to us that we want to have a very low risk posture in the fund while still generating cash distribution that exceeds the current rate of inflation. So that's why our effective duration is about 2.14 at the end of the quarter. And then turning to the next page, Austin already spoke about Radiant Group, we added a rather large position in Radiant and also its competitor MGIC Investment Corp, both of those companies raised significant amounts of capital and we felt like their credit profile improved dramatically as a result but was not reflected in the price of the bonds, and finally on the eliminate positions that we had a significant number of calls contenders that’s added up in the quarter to little bit over 5% that, that continues in the amount of April, and we would expect with a low duration that we have and the high coupons in the fund that we will continue to see a significant percentage of cash coming back to us over the next couple quarters. With that, I will turn it back to Julie.

Julie McConnell: Thanks Bill. That concludes our prepared remarks. Allen, we are now ready to begin the question and answer segment of the call.

Operator: (Operator Instructions)

Julie McConnell: We do have one question that we received prior to the call that we will get started with, it’d be probably best answered by Chris Bingaman. Your exposure to the financial sector has increased across most of your strategies. Are you concerned about a rise in interest rate and what will be the impact on your financial holdings if rates increase?

Chris Bingaman: Thanks Julie. Yeah, I think in general the interest rate environment right now is really tough for most of the sector, if you look at spread based lenders, the life insurance companies and even to some degree the insurance companies in terms of reinvestment rates and their bond portfolios, the current rate environment is basically a drag and pretty tough. So general increase in the overall level of rates especially – it was also a modest steepening of the yield curve I think would be really helpful for the sector. Of course, what's driving the increase might also be an important part of the equation, obviously the scenario where the economy continues to come back together and growth exceeds on the upside a bit and it looks like maybe the Fed needs to increase your rate to some degree, I think that would be the ideal scenario, and in an event as the Fed increasing I think the yield curve would steepen nicely so. That would be the ideal scenario but I think in general an increase in rates would actually be really helpful for the sector.

Operator: We have no questions at this time. (Operator Instructions)

Julie McConnell: We do have an additional question that we received for Rick Dillon. Rick, I notice that all of your new short positions in the long short fund this quarter were 30 basis points. Is that a typical position size for a new short position and how do you decide the position weeks?

Ric Dillon: Yes, we do initiate positions typically with smaller weights, 30 basis points of course that’s rounded to the nearest decimal point. But that would be a typical size for a new position and as we get confident in the position we will quickly build it p from there. But liquidity reasons are probably the chief among the reasons why we start with relatively small weights. Our median weight on the portfolio is probably a little less than 100 basis points. And of course our largest weight is up to 200 basis points. So we have had a position even smaller than 30, where borrowing shares has been a challenge. But you can expect going forward initiating positions similar to that 30 basis points rate.

Julie McConnell: Chris, what specific metric is for Apple cheap?

Chris Welch: Thanks for the question. There's a couple of points to the thesis for Apple is the lock-in provided by their iTunes and app environment and then specifically to the question of metric, we aren’t really looking at the free cash flow that the company can generate. So given the high intention of people who currently have iPhone, iPhones are 70% of the value of the company and people who currently have iPhone have indicated that by and large they tend to continue getting iPhones for their next phone and with the telecom carriers subsidy model people tend to get new phones every couple of years. We think that the company can generate roughly $40 billion in free cash flow annually and the time we purchase this their market cap was a little bit about $400 billion with over $100 billion cash on the balance sheet. So around $300 billion enterprise value, now some of that cash on the balance sheet is overseas but even adjusting for that slightly over $300 billion enterprise value generated $40 million in free cash flow. If they can continue to generate anywhere near that $40 billion in free cash flow that makes for a very inexpensive stock going forward and even given some of the recent news that we've seen about potential slowdown the demand for iPad and type of news, things like that, we still feel comfortable that, that $40 billion in free cash flow is a number we think that they can hit.

Julie McConnell: We have a question for Chuck. Chuck, in large cap strategy, has increased turnover (inaudible) higher transaction model and if so, has there been a material impact on performance?

Chuck Bath: Thanks Julie. Portfolio, the turnover has increased but we are talking maybe a 26% portfolio turnover which is in the trailing 12 months versus 20% they have been more of the norm. So I don’t really think that that’s major an increase and I think our portable turnover is low compared to other mutual funds out there. Having said that, there is zero cost on transaction costs. So we’ve worked hard to minimize those, certainly the commission costs are very minimal in terms of trade we execute and our traders work hard also to minimize any market impact we were to have in any trade and we try to keep that as minimal as possible too. But all those costs would flow through the former chambers, and we just had in the first quarter the fund did comparably outperformed its benchmark. So I don’t think an increase from a very low rate of 20% to a low rate of 26% would have that meaningful of an impact in transaction costs in the portfolio. And as part of our discipline, we are at – we have to basically sell to redress this intrinsic value. So our discipline sort of requires us that action, I think in the long-term I think the minimal transaction costs are an important aspect to make sure we continue the positive discipline to maximum the returns of the portfolio.

Julie McConnell: It doesn’t look like we have any additional questions. Allen, have you received any questions in the queue?

Operator: We have no questions at this time.

Julie McConnell: So we are coming up on the full hour. So we will go ahead and wrap up the call. For those of you how missed parts of the call or would like to listen to it again we will post a replay on our website in a few days. Once again thanks for joining us this afternoon and for your continued support of Diamond Hill and we look forward to speaking with you again next quarter.

Operator: Thank you ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.