Hello and welcome to the Diamond Hill Q2 2013 Portfolio Manager Conference Call and Webinar. My name is Maisha, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note this conference is being recorded. I would now turn the call over to Ms. Julie McConnell. You may begin.

Great. Thank you. Good afternoon everyone and welcome to the Diamond Hill second quarter portfolio manager conference call. We certainly thank you for joining us this afternoon. Like Maisha mentioned, my name is Julie McConnell and I will be moderating the call today. To start our call this afternoon, Bill Zox, who is Portfolio Manager of our Strategic Income Strategy, will provide an update on deleveraging in the United States. Then after Bill's comments, we will be followed by our portfolio manager reviews of all of our strategies. 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. [Operator Instructions]. As always, there are a 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 June 30. Portfolio holdings are subject to change without notice; and finally, a complete list of portfolio holdings as of June 30 is available on our website. The next two slides provide additional important disclosures and we would just ask that you review these at a later time. So with that, I will go ahead and turn the call over to Bill to get us started, who again is going to provide an update on deleveraging in the United States. Bill?

Thanks Julie. Before I start, I want to emphasize that the core of Diamond Hill is company-by-company, industry-by-industry research, like the piece that was sent out today by Austin Hawley, in the property and casualty insurance industry. But we are not oblivious to macroeconomic issues, and that's what I will talk about today. I also want to say that we don't have a [house view], these are my thoughts, as they pertain to what I do with the strategic income fund. I believe that deleveraging in the U.S. has been the dominant macroeconomic issue for us over the last five years, and I expect it will be for many years to come. The bottom line of these slides is that we continue to progress on the path of a successful deleveraging, and we are getting close to an important transition, where the deleveraging moves from the private sector to the government sector, and at that point, there is reason to believe that economic growth can kick up. On the first page, I show you the outside resources that I found most helpful on debt and deleveraging. I also want to thank Alice Gartner and Jack Parker for putting these slides together. Turning to the next page, we update the chart from last year that shows the private sector debt has declined more than government debt has increased. In the middle column on the table on the right, you will see that while government debt has increased 28 percentage points GDP from the fourth quarter of 2008, through the fourth quarter of 2012, the private sector deleveraging in the financial sector and the household sector has been 37 percentage points. So we have had nine percentage points of deleveraging since the fourth quarter of 2008 after something like 50 plus years…

Great, thanks Bill. We will now turn to our strategy update. I will mention that Chris Welch, who many of you know, is Portfolio Manager for our small mid-cap strategy is not available to join us this afternoon. So to get us started, Tom Schindler is going to provide an update on both the small cap strategy, and also the small midcap strategy.

Thank you, Julie. The Diamond Hill Small Cap Fund Class I returned 3.61% in the second quarter, compared to 3.08% for the Russell 2000 index. Together with the first quarter outperformance, this brings the year-to-date to 20.75%, about 490 basis points ahead of the Russell 2000. The five year trailing return is about in line with the index, while the since inception results exceed the index by over 440 basis points per annum. Looking at the five year risk statistics that continues to show a relatively lower volatility than the index. Looking at portfolio statistics, the fund is now approaching $1 billion in assets. The turnover rate has ticked up as a result of sales and replacement to those sales, as many more companies have met or are near their intrinsic value, but the 37% is still within expected range. Looking at the sector allocations, all sectors have been fairly stable throughout this year. During the quarter, all sectors, with the exception of energy, contributed positively to returns. Looking at the top 10 holdings, an assured guarantee drop down from the first and third largest holdings at 331 to be now the eighth and ninth largest holdings. New to the list would be Rosetta Resources, Avis Budget Group and Popular. Dropping out of the top 10 were Whiting, Cimarex and Trinity, as a result of either relative performance or these new shares in these new top 10 holdings being purchased. Turning to new positions, Avis Budget Group is the third largest rental car agency behind Hertz and the privately held enterprise. Enstar Group buys and manages run-off insurance businesses. Endurance Specialty Holdings is half, a primarily specialty lines insurance company, with over half of that being cross insurance, the other half being reinsurance; and Nationstar Mortgage Holdings is a non-bank…

Great, thanks Tom. Next I will turn the call to Chuck Bath for an update on the large cap strategy.

Thanks Julie. For the large cap funds, for the second quarter, the fund was up a little over 6% versus 2.65% for the Russell 1000 Index and year-to-date 18.42% versus just under 14% for the index. So we are pleased with the performance for 2013 year-to-date. You see some other and more important performance numbers as well for three, five and 10 years, and since inception, as you know, we always focus on the long term performance numbers, and while we are slightly lagged and still in three years, our five number is now ahead and our 10 year numbers and since inception numbers are comfortably ahead of the market, and we are pleased with that. The fund's sector allocation which you see before you, nothing has changed too much in this quarter, but it has marked the evolution of the portfolio, as financials over the last year become a bigger portion of the portfolio. They still remain the largest weighting in the portfolio. Consumer staples and healthcare are second and third respectively. Healthcare has declined due to weighting in the portfolio, mostly because many of our names reached our estimates intrinsic value, and were removed from the portfolio for that reason. But nonetheless, replacement for those holdings were often found in other areas of the market. You see, our total portfolio turnover rate was (inaudible) around 25%. That is typical and normal for this portfolio. Number of securities, 49, also under 50 is quite typical. I don't think we have been over 50 for quite some time, if that were so, that is more typical in terms of the holdings in the portfolio. You will see in the top 10 holdings list; Occidental and Medtronic, depending on short term performance, may or maybe top one or two, but those…

Great, thanks Chuck. Next, Rick Snowdon will provide an update on the Select strategy.

Thanks Julie. Short term performances just (inaudible) short term and may not prove to be meaningful over longer periods of time. However, we are certainly with the direction of the short term performance of the Select strategy; how we outperformed the benchmark for the second quarter, our year-to-date and one year periods, on a roughly 500, 900 and 1100 basis points respectively. On a three year performance (inaudible) benchmark by roughly 125 basis points, but the strategies outperformed the benchmark by 80 to 90 basis points for too long, as to therefore significant periods shown here, five years and inception to date. On slide 35, I would point out the trailing 12 month turnover number of 72%. This number is a residual of bottom-up stock selection, thus not something that we manage. But 72% is still higher than we would normally expect. This currently elevated number is a function of a number of stocks having approached or reach the intrinsic value recently, and is also the byproduct of some initial repositioning that occurred in the portfolio, when Austin and I first became involved with the strategy, during the first quarter. Also on page 35, we show the sector weights. These are generally consistent with where we were last quarter. On slide 36, our top 10 holdings are shown. Changes since the last quarter include Boston Scientific, Popular, Microsoft and Forest Labs, replacing Southwest Airlines, Hartford, which was eliminated entirely from the portfolio; Medtronics and Morgan Stanley. Positions eliminated from the portfolio include, Abbott Labs, Assured Guaranty, Schwab, McDonalds, Merck and Hartford, which I just mentioned. All of which were eliminated at prices approaching intrinsic value, and made room for the following new names; AIG, the insurance company; Warner Chilcott, a specialty pharma company. Hub Group, which is an intermodal transportation…

Great, thanks. Next up, Ric Dillon will provide an update on the Long Short strategy.

Thank you, Julie. Clearly in an upmarket, Long Short strategy would lag our long only strategies, and as all of our long positions are held in either our large cap and/or small mid-cap strategies, you have heard about the long positions and how they have done, and that explains entirely, the good results for the quarter and for the last year, and we are glad that we are meeting our long term goals over the -- since inception and longer periods of rivaling our long only benchmark. I want to make note of a minor change, where our secondary benchmark historically has been the 50-50 Russell 1000 and Bank of America-Merrill Lynch U.S.T. Bill Index. We are now using 60-40. The reason for that has to do with where we have tended to be. We recently have found that we are closer to that 60% versus 50 and so by using that as our second -- that minor change in our secondary benchmark, we think it should allow investors to have a better idea of what to expect over short periods of time. But again, over the long periods of time, our goal is to rival the long only benchmark, with a lot less volatility. The second thing I want to highlight, is that we continue to do, like all of our other strategies, view the financials most positively, and we are most cautious on the consumer discretionary, the latter of which has actually hurt us in the recent periods, but we still -- and I will go into some detail at the moment on a couple of names, as to why we are continuing with those positions. Our top holdings, not surprisingly from what you've heard earlier, are dominated by financial stocks, and with regards to our short positions,…

Thanks Ric. Next, we will hear from Chris Bingaman, with a review of our Financial Long-Short strategy.

Thanks Julie. The Financial fund had a good second quarter, up just about 8% versus 6.3% roughly for the S&P Super Composite Financials. You can see performance over the recent periods, very-very strong on an absolute basis. Pretty pleased with the performance, absolute in recent periods, and relative shift (inaudible) over all periods. Page 45, just some of the updates in terms of changes, statistics, and so forth. Net exposure was reasonably steady. It dipped a little bit during the middle part of the quarter, but then during the June, in particular sell-up in the market, we took the opportunity to add to some positions, so it ended up being fairly flat quarter-to-quarter. Gross exposure down a little bit from the second quarter. In terms of industry allocations, no real big changes there. Banking and the other industries, fairly stable. Insurance is the one area we will discuss in a minute, but did see a reduction in exposure. On Page 46, top holdings. A lot of these have been discussed in the top five; new names are AIG and Citi, strong relative performance and also adding to those on weakness, names that fell out were Hartford, which was completely sold and JPM which was trimmed during the quarter. Short holdings, top five, nothing real meaningful there. I think one new name is BancorpSouth is the only new name there. Little bit of movement among the others, but not much. I think most of the new positions have been previously. Couple exceptions, Capital One was added during the quarter at a percent and a half position size. It's a very large credit card issuer, something it has struggled a bit over the last few years, but the industry fundamentals are very-very strong, credit profiles are very-very good across the board. Capital…

Thanks Chris. Next, Austin Hawley will provide an update on the Research Opportunities fund.

Thanks Julie. In the second quarter, the Research Opportunities Fund Class I appreciated 5.06% compared to 5.06% compared to 2.69% for the Russell 3000. For the year-to-date period, the fund is up 18.68% compared to 14.06% for the Russell 3000 Benchmark. Since inception, the Research Opportunities fund has produced strong absolute returns, while trailing our long-only benchmark by a modest amount. This relative underperformance is not surprising in a sharply rising market environment. But over full market cycle, as we continue to expect positive relative returns, in addition to adequate, absolute returns. Turning to page 51, the fund has 69 long and 23 short positions at the end of the quarter, compared to 62 long and 20 short positions at the end of the first quarter. Gross exposure increased to 90.5% from 84% at the end of the first quarter, and our next exposure increased slightly to 68% from 66.5% at the end of the first quarter. Turnover at 40% is slightly higher than we would expect over the long term, as many of our positions increased to approach our estimates of intrinsic value. There are no significant changes during the quarter, based on a sector basis. Turning to page 53, looking at our top 10 holdings. New to our top 10 holdings in the quarter were AIG and Willis Group. These names replaced the Hartford, which was eliminated completely from the portfolio, and also Energizer. AIG was added during the first quarter, and the position size was increased during the second quarter, moving it into the top 10. Willis, one of the largest insurance brokers in the world is a new position during the quarter, and was added to replace the Hartford Group, which as I mentioned was eliminated. Looking at our new positions during the quarter, we had eight new long positions, and six eliminated positions. Of note during the quarter, three of our new long positions were international names. We had two ADRs based in Britain, the pharmaceutical company GlaxoSmithKline, and the retailer, Tesco, that were added; and Canadian pharmaceutical company Valeant, which is listed on the New York Stock Exchange, was also added during the quarter. Currently we have approximately 3.5% of the Research Opportunities fund in international holdings. Looking at the eliminated positions during the quarter; all the names with the exception of Devon, were at or nearing our estimates of intrinsic value. In the case of Devon, Devon was sold -- increased our position in Cimarex, where our analyst Suken Patel thought there was a better risk reward. Finally, turning to page 53 and looking at our best and worst performers; there were no significant contributors or detractors that have not -- already been addressed on this call. So at this point, I am going to go ahead and turn it back to Julie.

Thanks Austin. To wrap up our strategy update, I will turn the call back to Bill Zox for an update on the strategic income strategy.

Thanks. Starting with the five year performance; the Strategic Income Fund has generated a total return just (inaudible) 9% annually, compared to (inaudible) of 8% and just over 5% for our primary and secondary benchmarks. For the last quarter, which was a pretty good stress test for the fixed income markets, the fund was down at 66 basis points, compared to just under 300 basis points for the primary index, and 250 basis points for the secondary index; and while not (inaudible) here, the Bank of America-Merrill Lynch High Yield Index was down 1.35% during the quarter. So we feel good about how we held up, and what was I think a good stress test for the fixed income markets, of course, we don't like to lose money, but it was a very difficult quarter. The key differentiating factor in what we do, is that we do not manage the fund against an index, and our duration has been in the two for quite some time, which we think makes the most sense, and you just won't find a fund that's managed against either a core index, or a high yield index. Typically we would fund the [duration there in the course]. Turning to page 56, we started to include the slide last quarter, because our strategy is fairly unique, it is important to evaluate our returns on a risk adjusted basis, and while we do not define risk as volatility, this is the most common way and one of the few ways to quantify risk adjusted returns, so that's why we have included that, and we do feel that the returns, risk adjusted in this manner, have been good over these periods of time. Then finally, I am going to skip to the last slide, page 58. We were…

That concludes our prepared remarks this afternoon. So Maisha, we are now ready to begin the question-and-answer segment of the call.

[Operator Instructions].

We do have one question that we received here for Bill Zox. Bill, over the last few years, you have kept the strategic income strategy in mostly corporate bonds, and have continued to shorten the duration. Do you expect that to continue going forward?

I do expect that the strategy would be almost entirely in corporate bonds, but the one other class of securities that we used to be involved in, getting back largely more than five years, that was preferred securities, which if they were deeply discounted as they were in the financial crisis, at $0.50 from $1, I could see maybe returning to that space to some small extent, 5% to 10% of the fund. But we are very far from that today, so for the foreseeable future, I would expect the all-in corporate bonds. In terms of duration, our duration over the last five years or so has fluctuated between the low to mid to high threes, and that kept us below the duration of a four bond strategy, or a strategy managed against the high yield index and I would expect that it will always tend to be somewhat shorter, although not necessarily as (inaudible) we have been in the low twos, and in fact in this quarter, we are down into the mid to high twos today, compared to the low twos.

Maisha, are there any questions in the queue?

We have another question that we received for Chris Bingaman. Chris, with the strength in the financial sector stock, are you having a hard time finding attractive opportunities? And on the flipside, are you finding more short opportunities?

Yeah in general, if you look over the last year, I think the fund is up somewhere in the high 30s over the past 12 months. So no doubt, expected returns compared to a year ago are much-much less attractive on an absolute basis. It was very-very easy period of time then, and expected returns, we were modeling quite often in the mid and high teens. So today, it's much-much more difficult, but I still think, on a relative basis, the sector still seems fairly attractive, just not nearly as attractive as it was a year ago. So we have continued to sell holdings as they reach our intrinsic value estimates, net exposure in the financial long short fund is down, reflecting that. So we have built a couple of short positions, so it has become a little bit easy on the short side, a little tougher on the long side, but still think the sector is generally still relatively attractive.

Thanks Chris. We don't have any additional questions that we've received here. Are there any questions in the queue at this point?

We have no questions at this time.

Okay then, we will go ahead and wrap up the call. As a reminder, for those of you who missed parts of the call or would like to listen to it again, we will post a replay on the website, in a few days, and again, thank you for joining us today, and for your continued support of Diamond Hill, and we look forward to speaking with you again, next quarter.