TABLE OF
CONTENTS
Your fund
at a glance
page
1
Portfolio
Commentary
page
2
Fund’s
Investments
page
4
Financial
Statements
page
8
Notes to
Financial Statements
page
12
Directors
and Officers
page
23
Notice of
Privacy Policy
page
25
Welcome
Dear
Fellow Shareholders:
I am very
pleased to highlight that after an extremely volatile first half, 2009 ended up
being a strongly positive equity market for both the market as a whole and
specifically the financial sector. The mid cap portion of the market
led the way with the Russell 2500 up 34.39% for the year. The S&P
1500 SuperComposite Financials Index returned 15.46% for the period, while the
Diamond Hill Financial Trends Fund returned 22.67% at net asset
value.
As one
may guess, given the flattish returns over the first part of the year and very
strong full year returns, the overall market environment improved substantially
as the year progressed. Credit markets and risk spreads continued to
narrow during the back half of the year as liquidity returned to many areas of
the word-wide financial markets. Additionally, residential real
estate prices showed signs of stabilizing in many areas of the
country. Finally, the overall economy began to show hints of
improvement during the summer months and then even signs of strength, as we
closed out the year.
Looking
forward, we remain generally positive regarding the outlook for financial
stocks. Since the market lows in early March, financial stocks have
been strong performers, but have still substantially lagged the overall market
over the past three years. Many areas within the sector continue to be well
positioned for secular growth and by many measures appear to more than discount
the remaining cyclical headwinds. So while near-term fundamentals are
likely to remain challenged, we remain confident in the long-term outlook for
many of the key industries within the financial sector. We therefore
begin the new decade with continued optimism for U.S. equities in general and
our financial stock holdings in particular.
Lastly, I
would like to recognize the outstanding service to the shareholders provided by
Mr. H. Hall Ware and Mr. Robert Freedman, both of whom retired from the Board of
Directors in 2009. Messrs. Hall and Freedman provided exemplary
guidance as fiduciaries to the Fund’s shareholders for 20 and 13 years,
respectively. Their contributions will be missed.
As
always, on behalf of your Board of Directors, I would like to thank you for your
interest in the Fund and assure you of our collective commitment to meeting our
fiduciary duty to fellow shareholders.
Sincerely,
/s/ Franklin C.
Golden
Franklin
C. Golden
Chairman
of Diamond Hill Financial Trends Fund, Inc.
Your fund
at a glance
The
Fund seeks long-term capital appreciation with current income as a secondary
objective by investing at least 80% of its assets in stocks of U.S. financial
services companies of any size.
|
|
Over
the last year
|
|
|
|
|
>
|
2009
was a very strong year for the U.S. equity markets as well as the Diamond
Hill
Financial Trends Fund. The portfolio produced a 22.67% return
(at NAV) vs. 15.46% for its primary
benchmark.
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|
>
|
While
the financial sector performed well on an absolute basis, the sector
lagged the diversified indices for the third straight
year.
|
|
>
|
Financial
markets have improved dramatically in the past year and the overall
economic environment has begun to show some signs of
strength.
|
Diamond
Hill Financial Trends Fund, Inc.
Fund’s
average annual total returns for various periods ended December 31,
2009
The total
returns for the Fund are at net asset value and include the reinvestment of all
distributions.
The
performance data contained within this material represents past performance,
which does not
guarantee
future results.
Top
10 holdings
|
Wells Fargo & Co.
|
6.4%
|
|
Travelers Cos., Inc., The
|
3.4%
|
|
JP Morgan Chase & Co.
|
5.8%
|
|
Prudential Financial, Inc.
|
3.3%
|
|
Assured Guaranty Ltd.
|
3.8%
|
|
PNC Financial Services Group,
Inc.
|
3.2%
|
|
U.S. Bancorp
|
3.5%
|
|
National City Capital Trust IV,
8.00%
|
3.1%
|
|
Allstate Corp.
|
3.4%
|
|
Old Republic International
Corp.
|
3.0%
|
As a
percentage of net assets on December 31, 2009 and excludes any cash
equivalents.
Along
with the overall domestic equity markets, 2009 was a strongly positive year for
the Diamond Hill Financial Trends Fund. The portfolio produced a
22.67% total return at net asset value, as it benefited from a heavy long bias
which was maintained throughout the year. The Fund’s primary
benchmark (the S&P1500 SuperComposite Financials Index) posted a total
return of 15.46%, which lagged the broader U.S. equity indices once
again. The past year marked the third consecutive year the overall
financial sector trailed the market and the sixth straight year of relative
underperformance for the BKX (the KBW Bank Index) including three straight
calendar years of negative total returns.
It often
follows that after lengthy periods of poor returns, the stage is set for much
brighter days and we do believe this is the case once again for many financial
services companies. While many key industries within the sector
continue to struggle with the headwinds from the credit and economic crises
experienced over the past couple of years, the overall environment appears to be
improving at a steady pace. First and foremost, capital levels in the
banking industry have increased dramatically over the past year, and the private
sector continues to provide large amounts of new common equity capital allowing
for the repayment of TARP obligations, as well as the improvement of the
industry’s capital mix. In addition, while new regulatory guidelines
on capital levels (at least for the banks) are likely during 2010, these new
rules are not likely to be more burdensome than many investors already fear and
should also help increase investor confidence in the health and stability of the
overall industry. On the credit front, loan losses and securities
impairments continue, however, a tremendous amount of reserve building and/or
write downs have now taken place. Therefore the prospective headwind
is likely to be much less of a burden and could actually turn into a tailwind,
if indeed net charge-offs peak and begin to improve through
2010. Finally, the significantly healthier state of the equity and
credit markets is also quite beneficial to nearly the entire sector - from both
a general business as well as a capital cost perspective.
In terms
of contributions to performance, it should come as no surprise that the long
side of the portfolio provided nearly all of the return for the
year. In particular, a few of the meaningful contributors were the
larger capital markets focused firms such as JPMorgan Chase & Co. and Morgan
Stanley, the mono-line credit card companies American Express Co. and Discover
Financial Services, as well as two specialized insurance companies, XL Capital
Ltd. and Assured Guaranty Ltd. Finally, nearly all the preferred
issues we own in the Fund provided strong returns, including an issue from
Huntington Bancshares, Inc which was up very strongly for the year and offset
much of the negative effect of the common shares we held. Also, we
were pleased that the short portfolio was a positive (albeit very slight)
contributor in total during the strong up year. WesBanco, Inc. struggled with
commercial real estate exposure and was the largest contributor to performance
on the short side.
The
eliminations and new holdings in the Fund were somewhat higher than normal, as
we continued to make changes to the portfolio and the environment was extremely
volatile. Notable sales included American Express Co., Pinnacle
Financial Partners, Inc., Raymond James Financial, Inc. as well as XL Capital
Ltd. Some of the new long holdings in the Fund included Redwood
Trust, Inc., National Penn Bancshares, Inc., First Niagara Financial Group and
Horace Mann Educators Corp.
Christopher
M. Bingaman, CFA, Portfolio Manager, Austin Hawley, CFA,
Assistant
Portfolio Manager, John Loesch, CFA, Assistant Portfolio Manager
Consistent
with our overall investment philosophy, we believe shareholders in the Fund will
benefit from a relatively concentrated portfolio. We also believe our
ability to short stocks will provide clear long-term benefits. Once
again, our objective is to use shorting as a tool to enhance our performance
over time.
As
always, we would like to thank our shareholders for their continued support of
the Fund.
|
|
|
|
|
|
|
Christopher
M. Bingaman, CFA
Assistant
Portfolio Manager
|
Austin
Hawley, CFA
Assistant
Portfolio Manager
|
John
Loesch, CFA
Portfolio
Manager
|
Diamond
Hill Financial Trends Fund, Inc.
Diamond
Hill Financial Trends Fund, Inc.
Schedule
of Investments
December
31, 2009
|
|
|
Shares
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stocks — 12.1%
|
|
|
|
|
|
|
|
Banking
Services — 8.4%
|
|
|
|
|
|
|
|
Huntington
Bancshares, Inc., Series A, 8.50%
◊
|
|
|
1,310
|
|
|
$
|
1,126,600
|
|
|
National
City Capital Trust IV, 8.00%
|
|
|
48,875
|
|
|
|
1,220,898
|
|
|
Regions
Financing Trust III, 8.88%
◊
|
|
|
9,956
|
|
|
|
231,377
|
|
|
Wachovia Preferred Funding Corp., Series A,
7.25%
|
|
|
32,215
|
|
|
|
716,139
|
|
|
|
|
|
|
|
|
|
3,295,014
|
|
|
Financial
Services — 2.1%
|
|
|
|
|
|
|
|
|
|
Countrywide Capital V, 7.00%
◊
|
|
|
37,460
|
|
|
|
811,009
|
|
|
REITs
and Real Estate Management — 1.6%
|
|
|
|
|
|
|
|
|
|
iStar
Financial, Inc., Series F, 7.80%
|
|
|
63,530
|
|
|
|
454,875
|
|
|
LaSalle Hotel Properties, Series E,
8.00%
|
|
|
8,506
|
|
|
|
194,872
|
|
|
|
|
|
|
|
|
|
649,747
|
|
|
Total Preferred Stocks
|
|
|
|
|
|
|
4,755,770
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stocks — 74.9%
|
|
|
|
|
|
|
|
|
|
Asset
Management — 0.5%
|
|
|
|
|
|
|
|
|
|
Affiliated Managers Group, Inc.
*◊
|
|
|
2,675
|
|
|
|
180,161
|
|
|
Banking
Services — 27.1%
|
|
|
|
|
|
|
|
|
|
BB&T
Corp.
◊
|
|
|
27,027
|
|
|
|
685,675
|
|
|
City
National Corp.
◊
|
|
|
8,470
|
|
|
|
386,232
|
|
|
Comerica,
Inc.
◊
|
|
|
11,642
|
|
|
|
344,254
|
|
|
First
California Financial Group, Inc.
*
|
|
|
9,960
|
|
|
|
27,290
|
|
|
First
Financial Holdings, Inc.
◊
|
|
|
48,805
|
|
|
|
633,977
|
|
|
First
Niagara Financial Group, Inc.
◊
|
|
|
32,530
|
|
|
|
452,492
|
|
|
First
of Long Island Corp.
◊
|
|
|
16,770
|
|
|
|
423,443
|
|
|
Huntington
Bancshares, Inc.
◊
|
|
|
145,305
|
|
|
|
530,363
|
|
|
National
Penn Bancshares, Inc.
◊
|
|
|
137,675
|
|
|
|
797,138
|
|
|
NewBridge
Bancorp
*◊
|
|
|
51,512
|
|
|
|
114,357
|
|
|
PNC
Financial Services Group, Inc.
|
|
|
23,705
|
|
|
|
1,251,387
|
|
|
Seacoast
Banking Corp of Florida
|
|
|
46,710
|
|
|
|
76,137
|
|
|
SunTrust
Banks, Inc.
◊
|
|
|
40,100
|
|
|
|
813,629
|
|
|
Synovus
Financial Corp.
◊
|
|
|
103,518
|
|
|
|
212,212
|
|
|
U.S.
Bancorp
|
|
|
61,199
|
|
|
|
1,377,590
|
|
|
Wells Fargo & Co.
|
|
|
92,800
|
|
|
|
2,504,672
|
|
|
|
|
|
|
|
|
|
10,630,848
|
|
|
Capital
Markets — 4.8%
|
|
|
|
|
|
|
|
|
|
Bank
of New York Mellon Corp.
†
|
|
|
38,818
|
|
|
|
1,085,739
|
|
|
Morgan
Stanley
|
|
|
5,685
|
|
|
|
168,276
|
|
|
State Street Corp.
|
|
|
14,564
|
|
|
|
634,117
|
|
|
|
|
|
|
|
|
|
1,888,132
|
|
|
Diamond
Hill Financial Trends Fund, Inc.
|
See
notes to financial statements
|
|
|
|
Shares/ Par Value
|
|
|
Fair
Value
|
|
|
Financial
Services — 9.1%
|
|
|
|
|
|
|
|
Bank
of America Corp.
|
|
|
71,145
|
|
|
$
|
1,071,444
|
|
|
JPMorgan
Chase & Co.
†
|
|
|
54,123
|
|
|
|
2,255,305
|
|
|
Leucadia National Corp.
*◊
|
|
|
10,410
|
|
|
|
247,654
|
|
|
|
|
|
|
|
|
|
3,574,403
|
|
|
Insurance
— 29.1%
|
|
|
|
|
|
|
|
|
|
Aflac,
Inc.
|
|
|
7,000
|
|
|
|
323,750
|
|
|
Alleghany
Corp.
*◊
|
|
|
1,585
|
|
|
|
437,460
|
|
|
Allstate
Corp.
|
|
|
45,000
|
|
|
|
1,351,800
|
|
|
Assurant,
Inc.
|
|
|
39,015
|
|
|
|
1,150,162
|
|
|
Assured
Guaranty Ltd.
◊
|
|
|
69,051
|
|
|
|
1,502,550
|
|
|
First
American Corp.
◊
|
|
|
18,290
|
|
|
|
605,582
|
|
|
Hanover
Insurance Group, Inc., The
נ
|
|
|
6,765
|
|
|
|
300,569
|
|
|
Hartford
Financial Services Group, Inc.
|
|
|
17,495
|
|
|
|
406,934
|
|
|
Horace
Mann Educators Corp.
|
|
|
62,217
|
|
|
|
777,713
|
|
|
Marsh
& McLennan Cos., Inc.
|
|
|
35,355
|
|
|
|
780,638
|
|
|
Old
Republic International Corp.
◊
|
|
|
115,830
|
|
|
|
1,162,933
|
|
|
Prudential
Financial, Inc.
|
|
|
25,740
|
|
|
|
1,280,822
|
|
|
Travelers Cos., Inc., The
|
|
|
26,760
|
|
|
|
1,334,254
|
|
|
|
|
|
|
|
|
|
11,415,167
|
|
|
Other
Financials — 0.9%
|
|
|
|
|
|
|
|
|
|
MVC
Capital, Inc.
◊
|
|
|
29,040
|
|
|
|
342,672
|
|
|
REITs
and Real Estate Management — 3.4%
|
|
|
|
|
|
|
|
|
|
Mid-America
Apartment Communities, Inc. REIT
◊
|
|
|
9,210
|
|
|
|
444,659
|
|
|
Redwood
Trust, Inc. REIT
◊
|
|
|
62,285
|
|
|
|
900,641
|
|
|
|
|
|
|
|
|
|
1,345,300
|
|
|
Total
Common Stocks
|
|
|
|
|
|
$
|
29,376,683
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
Bonds — 2.7%
|
|
|
|
|
|
|
|
|
|
Banking
Services — 2.7%
|
|
|
|
|
|
|
|
|
|
AmSouth
Bank, 5.20%, 4/01/15
|
|
$
|
440,000
|
|
|
$
|
381,238
|
|
|
First
Horizon National Corp., 4.50%, 5/15/13
|
|
|
725,000
|
|
|
|
655,217
|
|
|
Total
Corporate Bonds
|
|
|
|
|
|
$
|
1,036,455
|
|
|
See
notes to financial statements
|
Diamond Hill Financial Trends
Fund, Inc.
|
|
|
|
|
|
|
Fair
|
|
|
|
|
Shares
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
Registered
Investment Companies — 32.6%
|
|
|
|
|
|
|
|
JPMorgan
Prime Money Market Fund-Capital Shares
††
|
|
|
8,779,669
|
|
|
$
|
8,779,669
|
|
|
JPMorgan
U.S. Government Money Market Fund-Capital Shares
|
|
|
4,000,802
|
|
|
|
4,000,802
|
|
|
Total
Registered Investment Companies
|
|
|
|
|
|
$
|
12,780,471
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Investment Securities — 122.3%
|
|
|
|
|
|
|
|
|
|
(Cost
$42,736,079)
**
|
|
|
|
|
|
$
|
47,949,379
|
|
|
|
|
|
|
|
|
|
|
|
|
Segregated
Cash With Brokers — 5.4%
|
|
|
|
|
|
|
2,133,128
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
Sold Short — (7.4%)
|
|
|
|
|
|
|
|
|
|
(Proceeds
$2,995,096)
|
|
|
|
|
|
|
(2,918,968
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
Other Assets (Liabilities) — (20.3%)
|
|
|
|
|
|
|
(7,951,470
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
Assets — 100.0%
|
|
|
|
|
|
$
|
39,212,069
|
|
|
*
|
Non-income
producing security.
|
|
**
|
Represents
cost for financial reporting
purposes.
|
|
◊
|
All
or a portion of the security is on loan. The total fair value of the
securities on loan, as of December 31, 2009, was
$8,460,133.
|
|
†
|
Security
position is either entirely or partially held in a segregated account as
collateral for securities sold short aggregating a total fair value of
$3,034,260.
|
|
††
|
This
security, which was purchased using cash collateral received from
securities on loan, represents collateral for securities loaned as of
December 31, 2009.
|
REIT -
Real Estate Investment Trust
|
Diamond
Hill Financial Trends Fund, Inc.
|
See
notes to financial statements
|
Diamond
Hill Financial Trends Fund, Inc.
Schedule of Securities Sold
Short
December
31, 2009
|
|
|
|
|
|
Fair
|
|
|
|
|
Shares
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
Common
Stocks — 7.4%
|
|
|
|
|
|
|
|
Banking
Services — 6.9%
|
|
|
|
|
|
|
|
First
Financial Bancshares, Inc.
|
|
|
9,400
|
|
|
$
|
509,762
|
|
|
Hancock
Holding Co.
|
|
|
8,840
|
|
|
|
387,103
|
|
|
Home
Bancshares, Inc.
|
|
|
21,340
|
|
|
|
513,654
|
|
|
M&T
Bank Corp.
|
|
|
5,855
|
|
|
|
391,641
|
|
|
Prosperity
Bancshares, Inc.
|
|
|
16,082
|
|
|
|
650,838
|
|
|
WesBanco,
Inc.
|
|
|
20,090
|
|
|
|
247,911
|
|
|
|
|
|
|
|
|
|
2,700,909
|
|
|
Capital
Markets — 0.6%
|
|
|
|
|
|
|
|
|
|
KBW,
Inc.
*
|
|
|
7,970
|
|
|
|
218,059
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Common Stocks Sold Short
|
|
|
|
|
|
|
|
|
|
(Proceeds
$2,995,096)
|
|
|
|
|
|
$
|
2,918,968
|
|
|
*
|
Non-dividend
expense producing security.
|
Percentages
disclosed are based on total net assets at December 31, 2009
|
See
notes to financial statements
|
Diamond Hill Financial Trends
Fund, Inc.
|
Statement of Assets and
Liabilities
December
31, 2009
This
Statement of Assets and Liabilities is the Fund’s balance sheet. It
shows the value of what the Fund owns, is due and owes. You’ll also
find the net asset value for each common share.
|
|
|
|
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|
Assets
|
|
|
|
|
Investments,
at fair value (cost $42,736,079) - including $8,460,133 of securities
loaned
|
|
$
|
47,949,379
|
|
|
Deposit
with broker for securities sold short
|
|
|
2,133,128
|
|
|
Receivable
for investments sold
|
|
|
782,820
|
|
|
Tax
reclaim receivable
|
|
|
15,975
|
|
|
Receivable
for dividends and interest
|
|
|
84,754
|
|
|
Prepaid
insurance
|
|
|
4,538
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
50,970,594
|
|
|
|
|
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Liabilities
|
|
|
|
|
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Return
of collateral for securities on loan
|
|
|
8,779,669
|
|
|
Securities
sold short, at value (proceeds $2,995,096)
|
|
|
2,918,968
|
|
|
Payable
for dividends on securities sold short
|
|
|
8,501
|
|
|
Payable
to Administrator
|
|
|
5,011
|
|
|
Payable
to Investment Adviser
|
|
|
1,382
|
|
|
Other
payables and accrued expenses
|
|
|
44,994
|
|
|
|
|
|
|
|
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Total
liabilities
|
|
|
11,758,525
|
|
|
|
|
|
|
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Net
Assets
|
|
|
|
|
|
Capital
paid-in
|
|
|
40,212,716
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|
|
Accumulated
net investment income
|
|
|
232,608
|
|
|
Accumulated
net realized loss on investments
|
|
|
(6,522,683
|
)
|
|
Net
unrealized appreciation on investments
|
|
|
5,289,428
|
|
|
|
|
|
|
|
|
Net
assets
|
|
$
|
39,212,069
|
|
|
|
|
|
|
|
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Net
asset value per share
|
|
|
|
|
|
Based
on 3,993,124 shares outstanding - 50 million shares
authorized
|
|
|
|
|
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with
par value of $0.001 per share.
|
|
$
|
9.82
|
|
|
Diamond
Hill Financial Trends Fund, Inc.
|
See
notes to financial statements
|
Statement of Operations
For
the year ended December 31, 2009
This
Statement of Operations summarizes the Fund’s investment income earned
and
expenses incurred in operating the Fund. It also shows net gains
(losses) for
the period stated.
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|
|
|
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Investment
income
|
|
|
|
|
Dividends
|
|
$
|
1,063,638
|
|
|
Interest
|
|
|
75,343
|
|
|
Securities
Lending
|
|
|
14,188
|
|
|
|
|
|
|
|
|
Total
investment income
|
|
|
1,153,169
|
|
|
|
|
|
|
|
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Expenses
|
|
|
|
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|
Investment
management fees
|
|
|
212,151
|
|
|
Administration
fees
|
|
|
48,958
|
|
|
Directors’
fees
|
|
|
111,779
|
|
|
Professional
fees
|
|
|
56,609
|
|
|
Regulatory
fees
|
|
|
18,000
|
|
|
Transfer
agent fees
|
|
|
15,600
|
|
|
Postage
and printing fees
|
|
|
9,295
|
|
|
Dividend
expense on securities sold short
|
|
|
58,198
|
|
|
Insurance
|
|
|
6,008
|
|
|
|
|
|
|
|
|
Total
expenses
|
|
|
536,598
|
|
|
|
|
|
|
|
|
Fees
waived by Adviser
|
|
|
(103,927
|
)
|
|
|
|
|
|
|
|
Net
expenses
|
|
|
432,671
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
|
720,498
|
|
|
|
|
|
|
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Realized
and unrealized gain (loss)
|
|
|
|
|
|
Net
realized gain (loss) on
|
|
|
|
|
|
Security
transactions
|
|
|
(4,238,919
|
)
|
|
Closed
short positions
|
|
|
1,440,059
|
|
|
Change
in net unrealized appreciation/depreciation of investments
|
|
|
9,237,714
|
|
|
|
|
|
|
|
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Net
realized and unrealized gain
|
|
|
6,438,854
|
|
|
|
|
|
|
|
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Increase
in net assets from operations
|
|
$
|
7,159,352
|
|
|
See
notes to financial statements
|
Diamond
Hill Financial Trends Fund, Inc.
|
Statements
of Changes in Net Assets
These
Statements of Changes in Net Assets show how the value of the Fund’s net assets
has
changed during the last two periods. The difference reflects earnings
less expenses,
any
investment gains and losses, distributions paid to shareholders and the net of
Fund
share transactions, if any.
|
|
|
Year
ended
December
31,
2009
|
|
|
Year
ended
December
31,
2008
|
|
|
Increase
(decrease) in net assets
|
|
|
|
|
|
|
|
From
operations
|
|
|
|
|
|
|
|
Net
investment income
|
|
$
|
720,498
|
|
|
$
|
1,498,106
|
|
|
Net
realized loss from security transactions
|
|
|
(4,238,919
|
)
|
|
|
(4,078,412
|
)
|
|
Net
realized gain from closed short positions
|
|
|
1,440,059
|
|
|
|
369,758
|
|
|
Change
in net unrealized appreciation/depreciation
|
|
|
9,237,714
|
|
|
|
(25,514,059
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in net assets resulting from operations
|
|
|
7,159,352
|
|
|
|
(27,724,607
|
)
|
|
|
|
|
|
|
|
|
|
|
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Distributions
to common shareholders
|
|
|
|
|
|
|
|
|
|
From
net investment income
|
|
|
(1,317,759
|
)
|
|
|
(413,288
|
)
|
|
From
net realized gain
|
|
|
—
|
|
|
|
(1,285,067
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Decrease
in net assets from distributions to common shareholders
|
|
|
(1,317,759
|
)
|
|
|
(1,698,355
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
assets
|
|
|
|
|
|
|
|
|
|
Beginning
of year
|
|
|
33,370,476
|
|
|
|
62,793,438
|
|
|
End
of year
|
|
$
|
39,212,069
|
|
|
$
|
33,370,476
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
net investment income
|
|
$
|
232,608
|
|
|
$
|
831,875
|
|
|
Diamond
Hill Financial Trends Fund, Inc.
|
See
notes to financial statements
|
Financial
Highlights
The
Financial Highlights shows how the Fund’s net asset value for a share has
changed
since
the end of the previous period.
|
|
|
Year
ended December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Per
share operating performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
asset value, beginning of year
|
|
$
|
8.36
|
|
|
$
|
15.73
|
|
|
$
|
21.25
|
|
|
$
|
19.46
|
|
|
$
|
19.09
|
|
|
Net
investment income
1
|
|
|
0.18
|
|
|
|
0.38
|
|
|
|
0.28
|
|
|
|
0.25
|
|
|
|
0.23
|
|
|
Net
realized and unrealized gain (loss) on investments
|
|
|
1.61
|
|
|
|
(7.33
|
)
|
|
|
(3.31
|
)
|
|
|
2.69
|
|
|
|
0.96
|
|
|
Total
from investment operations
|
|
|
1.79
|
|
|
|
(6.95
|
)
|
|
|
(3.03
|
)
|
|
|
2.94
|
|
|
|
1.19
|
|
|
Less
distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From
net investment income
|
|
|
(0.33
|
)
|
|
|
(0.10
|
)
|
|
|
(0.28
|
)
|
|
|
(0.26
|
)
|
|
|
(0.22
|
)
|
|
From
net realized gain
|
|
|
—
|
|
|
|
(0.32
|
)
|
|
|
(2.21
|
)
|
|
|
(0.89
|
)
|
|
|
(0.60
|
)
|
|
Total
distributions
|
|
|
(0.33
|
)
|
|
|
(0.42
|
)
|
|
|
(2.49
|
)
|
|
|
(1.15
|
)
|
|
|
(0.82
|
)
|
|
Net
asset value, end of year
|
|
$
|
9.82
|
|
|
$
|
8.36
|
|
|
|
15.73
|
|
|
$
|
21.25
|
|
|
$
|
19.46
|
|
|
Per
share market value, end of year
|
|
$
|
7.88
|
|
|
$
|
6.35
|
|
|
|
13.75
|
|
|
$
|
19.01
|
|
|
$
|
16.68
|
|
|
Total
return at net asset value
2
(%)
|
|
|
22.67
|
|
|
|
(44.30
|
)
|
|
|
(12.50
|
)
|
|
|
15.92
|
3
|
|
|
6.99
|
3
|
|
Total
return at market value
2
(%)
|
|
|
29.60
|
|
|
|
(51.60
|
)
|
|
|
(14.50
|
)
|
|
|
20.99
|
|
|
|
0.21
|
|
|
Ratios
and supplemental Ratios and Supplemental data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
assets, end of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions)
|
|
$
|
39
|
|
|
$
|
33
|
|
|
$
|
63
|
|
|
$
|
85
|
|
|
$
|
78
|
|
|
Ratio
of gross expenses to average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
assets (%)
|
|
|
1.64
|
|
|
|
1.53
|
|
|
|
1.30
|
|
|
|
1.21
|
|
|
|
1.18
|
|
|
Ratio
of net expenses to average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
assets (%)
|
|
|
1.32
|
|
|
|
1.26
|
|
|
|
1.28
|
|
|
|
1.21
|
|
|
|
1.18
|
|
|
Ratio
of net expenses to average net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
assets,
excluding dividends on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities
sold short (%)
|
|
|
1.15
|
|
|
|
1.15
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Ratio
of net investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
average net assets (%)
|
|
|
2.21
|
|
|
|
3.09
|
|
|
|
1.36
|
|
|
|
1.21
|
|
|
|
1.21
|
|
|
Portfolio
Turnover (%)
|
|
|
81
|
|
|
|
65
|
|
|
|
42
|
|
|
|
10
|
|
|
|
4
|
|
|
1
|
Based
on the average of the shares
outstanding.
|
|
2
|
Total
return based on net asset value reflects changes in the Fund’s net asset
value during each year. The total return based on market value
reflects changes in market value. Each figure assumes that
dividend and capital gain distributions, if any, were
reinvested. These figures will differ upon the level of any
discount from or premium to net asset value at which the Fund’s shares
traded during the year.
|
|
See
notes to financial statements
|
Diamond
Hill Financial Trends Fund, Inc,.
|
Notes to
Financial Statements
Note
1
Accounting
policies
The
Diamond Hill Financial Trends Fund, Inc. (the “Fund”) is a diversified
closed-end management investment company registered under the Investment Company
Act of 1940 (the “1940 Act”), as amended.
Significant
accounting policies of the Fund are as follows:
Valuation
of investments
Security
valuation
The Fund
records its investments at fair value. Fair Value is defined as the price that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The valuation
techniques used to determine fair value are further described
below.
The net
asset value of the common shares of the Fund is determined daily as of the close
of the NYSE, normally at 4:00 P.M. Eastern Time. Short-term debt investments of
sufficient credit quality maturing in less than 61 days are valued at amortized
cost, and thereafter assume a constant amortization to maturity of any discount
or premium, which approximates fair value. Investments in other
investment companies are valued at their reported net asset
value. All other securities held by the Fund are valued at the last
sale price or official closing price (closing bid price or last evaluated quote
if no sale has occurred) as of the close of business on the principal securities
exchange (domestic or foreign) on which they trade or, lacking any sales, at the
closing bid price. Securities traded only in the over-the-counter market are
valued at the last bid price quoted by brokers making markets in the securities
at the close of trading. Securities for which there are no such
quotations, principally debt securities, are valued based on the valuation
provided by an independent pricing service, which utilizes both dealer-supplied
and electronic data processing techniques, which take into account factors such
as institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data.
Other
assets and securities for which no such quotations are readily available (e.g.,
an approved pricing service does not provide a price, certain stale prices, or
an event that materially affects the furnished price) are valued at fair value
as determined in good faith under consistently applied procedures established by
and under the general supervision of the Board of Directors.
The
valuation techniques described maximize the use of observable inputs and
minimize the use of unobservable inputs in determining fair
value. These inputs are summarized in the three broad levels listed
below:
|
•
|
Level
1 – quoted prices in active markets for identical
securities
|
|
•
|
Level
2 – other significant observable inputs (including quoted prices for
similar securities, interest rates, prepayment speeds, credit risk,
etc.)
|
|
•
|
Level
3 – significant unobservable inputs (including the Fund’s own assumptions
in determining the fair value of
investments)
|
The
inputs or methodology used for valuing securities are not necessarily an
indication of the risk associated with investing in those
securities. For example, short-term debt securities of sufficient
credit quality maturing in less than 61 days are valued using amortized cost, in
accordance with rules under the Investment Company Act of
1940. Generally, amortized cost approximates the current fair value
of a security, but since the value is not obtained from a quoted price in an
active market, such securities would be reflected as Level 2.
|
Diamond
Hill Financial Trends Fund, Inc,.
|
|
The
following is a summary of the inputs used to value the Funds net assets as of
December 31, 2009:
|
|
|
Level
1 -
Quoted
Prices
|
|
|
Level
2 -
Other
Significant
Observable
Inputs
|
|
|
|
|
|
|
|
|
|
|
Investments
in Securities:
|
|
|
|
|
|
|
|
(Assets)
|
|
|
|
|
|
|
|
Common
Stocks*
|
|
$
|
29,376,683
|
|
|
$
|
—
|
|
|
Preferred
Stocks
|
|
|
4,755,770
|
|
|
|
—
|
|
|
Registered
Investment
|
|
|
|
|
|
|
|
|
|
Companies
|
|
|
12,780,471
|
|
|
|
—
|
|
|
Corporate
Bonds
|
|
|
—
|
|
|
|
1,036,455
|
|
|
Investments
in Securities Sold Short:
|
|
|
|
|
|
|
|
|
|
(Liabilities)
|
|
|
|
|
|
|
|
|
|
Common
Stocks*
|
|
$
|
(2,918,968
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
49,831,892
|
|
|
|
1,036,455
|
|
The Fund
had no Level 3 securities at December 31, 2009.
|
*
|
See
Schedule of Investments and Schedule of Securities Sold Short for industry
classification.
|
Investment
transactions
Investment
transactions are accounted for no later than the first business day after trade
date for daily net asset value calculations throughout the period. However, for
financial reporting purposes, investment transactions are reported on trade date
at the end of the period. Net realized gains and losses on sales of investments
are determined on the identified cost basis.
Short
sales
The Fund
is permitted to make short sales of securities. Short sales are
effective when it is believed that the price of a particular security will
decline, and involves the sale of a security which the Fund does not own in hope
of purchasing the same security at a later date at a lower price. To
make delivery to the buyer, the Fund must borrow the security, and the Fund is
obligated to return the security to the lender, which is accomplished by a later
purchase of the security by the Fund.
The Fund
will incur a loss as a result of a short sale if the price of the security
increases between the date of the short sale and the date on which the Fund
purchases the security to replace the borrowed security. The use of
short sales may cause the Fund to have higher expenses (especially dividend
expenses) than those of other equity mutual funds. Short sales are
speculative transactions and involve special risks, including greater reliance
on the Adviser’s ability to accurately anticipate the future value of a
security.
Securities
lending
The Fund
has a securities lending agreement with JPMorgan Chase Bank, N.A.
(“JPMorgan”). Under the terms of the agreement, JPMorgan is
authorized to loan securities on behalf of the Fund to approved
borrowers. In exchange, the Fund receives cash collateral in the
amount of at least 100% of the value of the securities loaned. The
cash collateral is invested in short term instruments as noted in the Schedule
of Investments. Although risk is mitigated by the collateral, the
Fund could experience a delay in recovering their securities and possible loss
of income or value if the borrower fails to return them. The
agreement indemnifies the Fund from losses incurred in the event of a borrower’s
material default of the terms and conditions of the borrower
agreement. The agreement provides that after predetermined rebates to
brokers, net securities lending income shall first be solely paid as credits and
offset against costs and other charges incurred by the Fund with
JPMorgan. Any remaining securities lending revenue is then paid to
the Fund as securities lending income. The net securities lending
income is presented in the Statement of Operations.
|
|
Diamond
Hill Financial Trends Fund, Inc,.
|
As of
December 31, 2009, the value of securities loaned and the collateral held were
as follows:
|
|
Fair
Value
of
Securities
|
Fair
Value of
Collateral
|
|
|
|
Loaned
|
Received
|
|
|
|
$
8,460,133
|
$
8,779,669
|
|
Federal
income taxes
The Fund
qualifies as a “regulated investment company” by complying with the applicable
provisions of the Internal Revenue Code and will not be subject to federal
income tax on taxable income that is distributed to shareholders. Therefore, no
federal income tax provision is required. The Fund has analyzed its
tax positions taken on Federal income tax returns for all open tax years (tax
years ended December 31, 2006 through 2009) and has concluded that no provision
for income tax is required in the financial statements.
Dividends,
interest and distributions
Dividend
income on investment securities is recorded on the ex-dividend date or, in the
case of some foreign securities, on the date thereafter when the Fund identifies
the dividend. Interest income on investment securities is recorded on
the accrual basis. Foreign dividend income may be subject to foreign withholding
taxes, which are accrued as applicable.
The Fund
records distributions to shareholders from net investment income and net
realized gains, if any, on the ex-dividend date.
Such
distributions on a tax basis, are determined in conformity with income tax
regulations, which may differ from U.S. generally accepted accounting principles
(GAAP). Distributions in excess of tax basis earnings and profits, if
any, are reported in the Fund’s financial statements as a return of
capital.
Use
of estimates
The
preparation of financial statements, in accordance with GAAP, requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of income and
expenses during the reporting period. Actual results could differ
from these estimates.
Note
2
Management
fees and transactions with affiliates and others Investment
Advisory
The Fund
has entered into an Investment Advisory Agreement with Diamond Hill Capital
Management, Inc. (“Adviser”), whereby the Adviser provides management of the
investment and reinvestment of the Fund’s assets; continuous review,
supervision, and administration of the investment program of the Fund and
provides office space, furnishings and equipment used to carry out the
investment management of the Fund. For these services, the Adviser
receives a fee at an annual rate of 0.65% of the Fund’s average weekly net asset
value, or a flat annual fee of $50,000, whichever is higher. If total Fund
expenses exceed 2% of the Fund’s average weekly net asset value in any one year,
the Fund requires the Adviser to reimburse the Fund for such excess, subject to
a minimum fee of $50,000. However, pursuant to the Expense Limitation Agreement
(“Limitation Agreement”), the Adviser has agreed to limit the operating
expenses, excluding dividend expense on securities sold short, of the Fund to an
annual rate of 1.15% of the average weekly net assets of the
Fund. This Limitation Agreement was effective through January 2,
2010.
Beginning January 3, 2010, the Adviser has agreed to waive its
investment advisory fees to maintain a total operating expense ratio no greater
than 1.59%, excluding dividend expense on securities sold short, subject to a
maximum waiver of 0.15%. This new Limitation Agreement will continue
until December 31, 2010.
|
Diamond
Hill Financial Trends Fund, Inc,.
|
|
Administration
The Fund
has entered into an Administration Agreement with Diamond Hill Capital
Management, Inc. (“Administrator”), whereby the Administrator agrees to oversee
the determination and publication of the Fund’s net assets value, the
maintenance of the books and records of the Fund; prepare the financial
information for the Fund’s proxy statements, if required, and semi-annual and
annual reports to shareholders; prepare the Fund’s periodic financial reports to
the Securities and Exchange Commission; respond to shareholder inquiries; and
supply the Board of Directors and officers of the Fund with all statistical
information and reports reasonably required by them. For these
services, the Administrator receives a fee at an annual rate of $22,000 or 0.15%
of the Fund’s average weekly assets, whichever is higher.
The
Administrator has entered into a Sub-Administration Agreement with JPMorgan,
whereby JPMorgan will provide sub-administration services for the
Fund. The services provided under the agreement includes day-to-day
administration of matters related to the corporate existence of the Fund (other
than rendering investment advice), maintenance of books and records,
preparation of reports, and supervision of the Fund’s arrangement with the
custodian.
The Fund
does not pay remuneration to its Officers. Certain Officers of the Fund are
employees of the Adviser.
Note
3
Guarantees
and indemnifications
Under the
Fund’s organizational documents, its Officers and Directors are indemnified
against certain liability arising out of the performance of their duties to the
Fund. Additionally, in the normal course of business, the Fund enters into
contracts with service providers that contain general indemnification clauses.
The Fund’s maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Fund that have not yet
occurred. However, based on experience, the Fund believes the risk of loss to be
remote.
Note
4
Fund
share transactions
The Fund
had no share transactions during the last two years.
The Fund
from time-to-time may, but is not required to, make open market repurchases of
its shares in order to attempt to reduce or eliminate the amount of any market
value discount or to increase the net asset value of its shares, or both. In
addition, the Board currently intends, each quarter during periods when the
Fund’s shares are trading at a discount from the net asset value, to consider
the making of tender offers. The Board may at any time, however, decide that the
Fund should not make share repurchases or tender offers.
Note
5
Investment
transactions
Purchases
and proceeds from sales or maturities of securities, other than short term
securities and obligations of the U.S. government, during the year ended
December 31, 2009, aggregated $25,693,586 and $29,180,742,
respectively.
Note
6
Federal
Tax Information
The
amount and character of income and capital gain distributions paid by the Fund
are determined in accordance with Federal income tax regulations which may
differ from GAAP. The tax character of distributions paid may differ
from the character of distributions shown on the Statements of Changes in Net
Assets due primarily to short-term capital gains being treated as ordinary
income for tax purposes.
|
|
Diamond
Hill Financial Trends Fund, Inc,.
|
The tax
character of dividends paid to shareholders during 2009 and 2008 was as
follows:
|
|
|
|
Ordinary
|
|
|
Long-Term
|
|
|
|
|
|
|
|
|
Income
|
|
|
Gains
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
$
|
1,317,759
|
|
|
$
|
—
|
|
|
|
1,317,759
|
|
|
2008
|
|
|
|
945,639
|
|
|
|
752,716
|
|
|
|
1,698,355
|
|
The
following information is computed on a tax basis for each item of the Fund as of
December 31, 2009:
|
Tax
cost of portfolio investments
|
|
$
|
43,044,466
|
|
|
|
|
|
|
|
|
Gross
unrealized appreciation
|
|
|
7,726,512
|
|
|
Gross
unrealized depreciation
|
|
|
(2,745,471
|
)
|
|
|
|
|
|
|
|
Net
unrealized appreciation
|
|
|
4,981,041
|
|
|
Undistributed
ordinary income
|
|
|
189,676
|
|
|
Capital
loss carryforwards
|
|
|
(6,171,364
|
)
|
|
|
|
|
|
|
|
Accumulated
deficit
|
|
$
|
(1,000,647
|
)
|
As of
December 31, 2009 the Fund had net capital loss carryforwards expiring as
follows:
|
|
|
Expires
|
|
|
|
Amount
|
December
31,
|
|
|
|
|
|
|
|
|
$2,177,195
|
2016
|
|
|
|
3,994,169
|
2017
|
|
Certain
reclassifications have been made to the components of net assets, the result of
investments in Real Estate Investment Trusts. The following
reclassifications have no impact on the net assets or net asset value per share
of the Fund and are designed to present the Fund’s capital accounts on a tax
basis:
|
|
Accumulated
|
Accumulated
|
|
|
|
Net
Investment
|
Net
Realized
|
|
|
|
Income
|
Losses
|
|
|
|
|
|
|
|
|
$
(2,006)
|
$
2,006
|
|
Note
7
Subsequent
Events
The Fund
evaluated subsequent events from December 31, 2009, the date of these financial
statements, through February 23, 2010, the date these financial statements were
issued and available. There were no subsequent events to report that
would have a material impact on the financial statements.
|
Diamond
Hill Financial Trends Fund, Inc,.
|
|
Report of
Independent Registered Public Accounting Firm
The Board
of Directors and Shareholders of
the
Diamond Hill Financial Trends Fund, Inc:
We have
audited the accompanying statement of assets and liabilities of the Diamond Hill
Financial Trends Fund, Inc. (the Fund), including the schedule of investments,
as of December 31, 2009, and the related statements of operations for the year
then ended, the statements of changes in net assets for each of the two years in
the period then ended, and the financial highlights for each of the three years
in the period then ended. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits. The financial highlights for the two years ended
December 31, 2006 were audited by other auditors whose report dated February 16,
2007, expressed an unqualified opinion on those financial
statements.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. We were
not engaged to perform an audit of the Fund's internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included
confirmation of securities owned as of December 31, 2009, by correspondence with
the custodian and brokers. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the financial statements and financial highlights referred to above
present fairly, in all material respects, the financial position of the Diamond
Hill Financial Trends Fund, Inc. at December 31, 2009, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the three years in the period then ended, in conformity with U.S. generally
accepted accounting principles.
Cincinnati,
Ohio
February
23, 2010
Supplemental
Information (unaudited)
Tax
information
For
federal income tax purposes, the following information was furnished with
respect to the distributions of the Fund, if any, paid during its taxable year
ended December 31, 2009.
With
respect to the ordinary dividends paid by the Fund for the fiscal year ended
December 31, 2009, 100% of the dividends qualified for the corporate
dividends-received deduction.
The Fund
designated the maximum amount allowable of its net taxable income as qualified
dividend income as provided in the Jobs and Growth Tax Relief Reconciliation Act
of 2003. This amount was reflected on Form 1099-DIV for the calendar
year 2009.
Shareholders
were mailed a 2009 U.S. Treasury Department Form 1099-DIV in January
2010. This will reflect the total of all distributions that are
taxable for calendar year 2009.
Proxy
Voting
The
investment adviser is responsible for exercising the voting rights associated
with the securities purchased and held by the Funds. A description of the
policies and procedures that the Adviser uses in fulfilling this responsibility
and information regarding how those proxies were voted during the twelve month
period ended June 30 are available without charge upon request by calling
1-614-255-4080 or on the Securities and Exchange Commission’s website at
http://www.sec.gov.
Investment
objective and policy
The
Fund’s primary investment objective is long-term capital
appreciation. Its secondary investment objective is current income.
The Fund will seek to achieve its primary investment objective of long-term
capital appreciation by investing between 80% and 115% of its assets long and
sell short between 0% and 30% of its assets in stocks of U.S. financial services
companies of any size. These companies include banks, thrifts, finance
companies, brokerage and advisory firms, real estate-related firms, insurance
companies and financial holding companies. These companies are
usually regulated by governmental or quasi-governmental entities and, as a
result, are subject to the risk that regulatory developments will adversely
affect them. With respect to the Fund’s investment policy of investing at least
80% of “assets” in equity securities, “assets” is defined as net assets plus the
amount of any borrowings for investment purposes. The Fund will notify
shareholders at least 60 days prior to any change in this policy. In
abnormal market conditions, the Fund may take temporary defensive
positions.
As such,
the Fund may temporarily invest all of its assets in investment-grade,
short-term securities. In such circumstances, the Fund may not achieve its
objective. The Fund’s current investment restriction, relating to industry
concentration, has been modified to remove the reference to the banking and
savings industry so that it reads as follows: “Except for temporary defensive
purposes, the Fund may not invest more than 25% of its total assets in any one
industry or group of related industries, except that the Fund will invest more
than 25% of its assets in the financial services sector.”
Director
Approval of Investment Advisory Agreement
The
Directors of Diamond Hill Financial Trends Fund (the “Fund”), at a regularly
scheduled meeting on August 12, 2009, by a unanimous vote, approved the
Management Agreements between the Fund and Diamond Hill Capital Management, Inc.
(the “Adviser”). The Directors discussed the following factors in connection
with the Fund’s Management Agreements (“investment advisory
agreements”):
|
(i)
|
The nature, extent and
quality of services to be provided and the investment performance of the
Fund and the portfolio manager
. The Board considered the
reputation, financial strength, key services and operations, resources and
expertise of the Adviser as a firm, including the structure of its
organization, its relationships, reputation and financial strength, its
access to existing shared knowledge in capital markets and trends, and its
ability to attract and maintain highly-qualified, professional
talent. The Board noted its strong satisfaction with the entire
professional staff of the Adviser, the recent staff additions and the
investment driven culture of the firm. The Board also assessed
the services and attention provided by the Adviser since its engagement in
December 2007 noting its satisfaction and that the Adviser had met or
exceeded all the expectations the Board had of the Adviser at the time of
the original engagement.
|
|
(ii)
|
The investment
performance of the Company and the Adviser
. In this
regard, the Board compared the performance of the Company with the
performance of various indexes and comparable funds during the Adviser’s
tenure. The Board noted that in a difficult market environment
the Company outperformed the S&P 1500 Financial Index and performed
slightly better than the Adviser’s Financial Long-Short Fund, a similar
fund to the Company. Following discussion, the Board concluded
that the investment performance of the Company was satisfactory and
consistent with the Fund’s objectives and
policies.
|
|
(iii)
|
The costs of the
services to be provided and profits to be realized by the Adviser from the
relationship with the Company
. In this respect, the
Board considered the Adviser’s staffing, personnel and methods of
operating, the financial condition of the Adviser and the level of
commitment to the Fund by the Adviser and its principals. Among
other things, the Board specifically noted the Adviser’s two-year
agreement at the outset of the engagement to waive fees and reimburse the
Company for certain expenses of the Company to ensure that the total
annual operating expense ratio would not exceed 1.15%. The
Board noted that at the time the expense limitation agreement was reached
no one foresaw the material devaluation in financial asset values and the
resulting material reduction in the Company’s net assets. As a
result, the Adviser was required to waive a significant amount of its
advisory fee. The Board also noted that the Company’s advisory
fees were among the lowest of all financial service Funds and that no
Adviser client paid a lower fee. Following discussion, the
Board concluded that the fees paid to the Adviser were reasonable in light
of all circumstances.
|
|
(iv)
|
The extent to which
economies of scale will be realized as the Company grows and whether fee
levels reflect those economies of scale
. The Board
considered whether economies of scale would be realized by the Company at
higher asset levels. The Board considered the current economic
conditions and the Company’s current asset size and concluded that under
foreseeable conditions, it was unable to assess at this time whether
economies of scale would be realized if the Company was to experience
significant asset growth. In the event the Company were to
experience significant asset growth, the Board determined to reassess
whether the advisory fee appropriately took into account any economies of
scale that had been realized as a result of such
growth.
|
Having
considered (1) the nature, extent and quality of the services to be provided and
the investment performance of the Fund and the portfolio manager, (2) the
investment performance of the Company and the Adviser, (3) the costs of the
services to be provided and profits to be realized by the Adviser from the
relationship with the Fund, (4) the extent to which economies of scale will be
realized as the Company grows and whether fee levels reflect those economies of
scale, as discussed more fully above. The Directors, all of whom
qualify as Independent Directors under the 1940 Act, concluded it was
appropriate to renew the investment advisory agreements.
Portfolio
management
Mr.
Christopher Bingaman assumed responsibility as the portfolio manager of the Fund
on December 1, 2007. Mr. Bingaman has a Bachelor of Arts degree in
Finance (cum laude) from Hillsdale College, a Masters degree in Business
Administration from the University of Notre Dame and holds the CFA designation.
He has been an investment professional with Diamond Hill Capital Management,
Inc. since March 2001. From 1998 to March 2001, Mr. Bingaman was a Senior Equity
Analyst for Villanova Capital/Nationwide Insurance. In 1997, Mr. Bingaman was an
Equity Analyst for Dillon Capital Management, an investment advisory
firm.
Mr.
Austin Hawley assumed responsibility as assistant portfolio manager of the Fund
on December 31, 2009. Mr. Hawley has a B.A. degree in history with an
economics minor from Dartmouth College (cum laude), a Masters degree in Business
Administration from the Tuck School of Business at Dartmouth College, and holds
the CFA designation. He has been an investment professional with
Diamond Hill Capital Management, Inc. since August 2008. From 2004 to
2008, Mr. Hawley was an Equity Analyst at Putnam Investments. He
served as an Investment Associate at Putnam Investments from 1999 to
2002.
Mr. John
Loesch assumed responsibility as assistant portfolio manager of the Fund on
December 31, 2009. Mr. Loesch has a B.S. degree in public affairs
with an emphasis in public financial management from Indiana University, a
Masters degree in Business Administration from University of Notre Dame -
Mendoza College of Business (cum laude), and holds the CFA
designation. He has been with Diamond Hill Capital Management, Inc.
since May 2007. From 2003 to 2006, Mr. Loesch was an Analyst with
Nationwide Financial. He served as a Financial Advisor with UBS
Financial Services from 2001 to 2003.
Bylaws
In
January 2003, the Board of Directors adopted several amendments to the Fund’s
bylaws, including provisions relating to the calling of a special meeting and
requiring advance notice of shareholder proposals or nominees for director. The
advance notice provisions in the bylaws require shareholders to notify the Fund
in writing of any proposal that they intend to present at an annual meeting of
shareholders, including any nominations for Director, between 90 and 120 days
prior to the first anniversary of the mailing date of the notice from the prior
year’s annual meeting of shareholders. The notification must be in the form
prescribed by the bylaws. The advance notice provisions provide the Fund and its
Directors with the opportunity to thoughtfully consider and address the matters
proposed before the Fund prepares and mails its proxy statement to shareholders.
Other amendments set forth the procedures that must be followed in order for a
shareholder to call a special meeting of shareholders. The Fund is presently
listed on NASDAQ and, per a grandfathering provision, is not required to hold
annual shareholder meetings. The Board approved the above amendment to the
Fund’s bylaws to provide a defined structure for the submission of shareholder
proposals should the circumstances change and an annual meeting be required.
Please contact the Secretary of the Fund for additional information about the
advance notice requirements or the other amendments to the
bylaws.
In
November 2005, the Fund’s Board of Directors adopted several amendments to the
Fund’s bylaws regarding the Chairman of the Board position: The Chairman of the
Board shall at all times be a director who is not an interested person of the
Fund as that term is defined by the Investment Company Act of 1940. The scope of
the Chairman’s responsibilities and fiduciary obligations were further defined.
Lastly, disclosure regarding the election, resignation and removal of the
Chairman as well as the filling of a vacancy was added.
At a
quarterly meeting of the Fund’s Board of Directors held February 13, 2006, the
Board amended Article II Section 2 of the Fund’s bylaws to state that a special
meeting of the shareholders, unless otherwise provided by law or by the Articles
of Incorporation, may be called for any purpose or purposes by a majority of the
Board of Directors, the President, or, subject to Section 2(c), by the Secretary
of the Corporation upon the written request of shareholders entitled to cast at
least 35% of all votes entitles to be cast at the meeting.
Dividends
and distributions
During
the year ended December 31, 2009 dividends from net investment income totaling
$0.33 per share were paid to shareholders. The dates of payments and the amounts
per share are as follows:
|
|
|
INCOME
|
|
|
PAYMENT
DATE
|
|
DIVIDEND
|
|
|
August
20, 2009
|
|
$
|
0.21
|
|
|
December
17, 2009
|
|
|
0.12
|
|
Dividend
reinvestment plan
The Fund
offers its registered shareholders an automatic Dividend Reinvestment Plan (the
“Plan”), which enables each participating shareholder to have all dividends
(including income dividends and/or capital gains distributions) payable in cash,
reinvested by Mellon Investor Services (the “Plan Agent”) in shares of the
Fund’s common stock. However, shareholders may elect not to enter into, or may
terminate at any time without penalty, their participation in the Plan by
notifying the Plan Agent in writing. Shareholders who do not participate in the
Plan will receive all dividends in cash.
In the
case of shareholders such as banks, brokers or nominees who hold shares for
others who are the beneficial owners, the Plan Agent will administer the Plan on
the basis of record ownership of shares. These record shareholders will receive
dividends under the Plan on behalf of participating beneficial owners and cash
on behalf of non-participating beneficial owners. These record holders will then
credit the beneficial owners’ accounts with the appropriate stock or cash
distribution.
Whenever
the market price of the Fund’s stock equals or exceeds net asset value per
share, participating shareholders will be issued stock valued at the greater of
(i) net asset value per share or (ii) 95% of the market price. If the net asset
value per share of the Fund’s stock exceeds the market price per share, the Plan
Agent shall make open market purchases of the Fund’s stock for each
participating shareholder’s account. These purchases may begin no sooner than
five business days prior to the payment date for the dividend and will end up to
thirty days after the payment date. If shares cannot be purchased within thirty
days after the payment date, the balance of shares will be purchased from the
Fund at the average price of shares purchased on the open market. Each
participating shareholder will be charged a pro rata share of brokerage
commissions on all open market purchases. The shares issued to participating
shareholders, including fractional shares, will be held by the Plan Agent in the
name of the shareholder. The Plan Agent will confirm each acquisition made for
the account of the participating shareholders as soon as practicable after the
payment date of the distribution.
The
reinvestment of dividends does not relieve participating shareholders of any
federal, state or local income tax that may be due with respect to each
dividend. Dividends reinvested in shares will be treated on your federal income
tax return as though you had received a dividend in cash in an amount equal to
the fair market value of the shares received, as determined by the prices for
shares of the Fund on the Nasdaq National Market System as of the dividend
payment date. Distributions from the Fund’s long-term capital gains will be
taxable to you as long-term capital gains. The confirmation referred to above
will contain all the information you will require for determining the cost basis
of shares acquired and should be retained for that purpose. At year end, each
account will be supplied with detailed information necessary to determine total
tax liability for the calendar year.
All
correspondence or additional information concerning the Plan should be directed
to the Plan Agent, Mellon Bank, N.A., c/o Mellon Investor Services at
P.O. Box 3338, South Hackensack, New Jersey 07606-1938 (Telephone:
1-877-254-8583).
Shareholder
communication
and
assistance
If you
have any questions concerning the Fund, we will be pleased to assist you. If you
hold shares in your own name and not with a brokerage firm, please address all
notices, correspondence, questions or other communications regarding the Fund to
the transfer agent at:
Mellon
Investor Services
Newport
Office Center VII
480
Washington Boulevard
Jersey
City, NJ 07310
Telephone:
1-877-254-8583
If your
shares are held with a brokerage firm, you should contact that firm, bank or
other nominee for assistance.
This
chart provides information about the Directors and Officers who oversee your
Diamond Hill Financial Trends Fund. Officers elected by the Directors manage the
day-to-day operations of the Fund and execute policies formulated by the
Directors.
|
Independent
Directors
1
|
|
|
|
|
|
|
|
Name,
age
|
|
|
|
Position(s)
held with Fund
|
|
Director
|
|
Principal
occupation(s) and other
|
|
of
Fund
|
|
directorships
during past 5 years
|
|
since
2
|
|
|
|
|
|
Franklin
C. Golden, Born: 1950
|
|
1989
|
|
Chairman
and Director
Managing
Director, Wells Fargo Advisors (since 2001) (broker dealer); President,
James Myers and Company (full-service broker dealer) (until
2001);President, Financial Trends Fund, Inc. (until 2001); Executive Vice
President, IJL/Wachovia (until 1991); Past Director and Chairman of the
National Association of Securities Dealers (NASD) District 7 Business
Conduct Committee.
|
|
|
|
|
|
|
|
Russell
J. Page, Born: 1942
|
|
2003
|
|
Director
Principal,
Rusty Page & Co. (equity markets consulting) (since 1996); Regional
Board,BB&T Corp. (since 2004); former Trustee, Appalachian Regional
Healthcare Systems; NationsBank Equity Marketing Executive (until 1996),
Senior Nasdaq Stock Market Managing Director (until 2001); Trustee, Lees
McRae College Board of Visitors.
|
|
|
|
|
|
|
|
Fred
G. Steingraber, Born: 1938
|
|
1989
|
|
Director
Chairman
of Board Advisors, Chairman and CEO A.T. Kearney (1983-2002), President,
Village of Kenilworth Board of Trustees, Director Elkay Manufacturing,
Indiana University Kelley School of Business, Dean’s Advisory Council,
University of Chicago Booth School of Business, Dean’s Council, Indiana
University Foundation, Board of Trustees, National Association of
Corporate Directors (NACD), Chicago Council on Global Affairs, Board of
Directors
|
|
|
|
|
|
|
|
Donald
R. Tomlin, Born: 1933
|
|
1989
|
|
Director
Vice
President of Livingston Group Asset Management Company (operating as
Southport Capital Management) (since 2001); Managing Director, Southport
Capital, Inc. (registered investment adviser) (until 2001); Managing
Director and portfolio manager of Haven Capital Management, Inc. (until
1991); Principal and portfolio manager of Kleinwort Benson McCowan Inc.
and its successor McCowan Associates, Inc. (until 1983).
|
|
|
|
Principal
Officers
1
|
|
|
|
|
|
|
|
Name,
age
|
|
Officer
|
|
Position(s)
held with Fund
|
|
of
Fund
|
|
Principal
occupation(s) at least the last 5 years
|
|
since
2
|
|
|
|
|
|
James
F. Laird, Jr., Born: 1957
|
|
December
1, 2007
|
|
President
|
|
|
|
Chief
Financial Officer of Diamond Hill Investment Group, Inc., since December
2001. Vice President Corporate Strategy with Nationwide Insurance from
January 2001 to July 2001. Senior Vice President Product
Development with Villanova Capital from February 1999 through December
2000.
|
|
|
|
|
|
|
|
Gary
R. Young, Born: 1969
|
|
December
1, 2007
|
|
Treasurer,
Secretary, and Chief Compliance Officer
|
|
|
|
Controller
of Diamond Hill Investment Group, Inc., since April 2004.
Director
of Mutual Fund Administration with Banc One Investment Advisors October
1998 through April 2004. Vice President and Manager of Mutual
Fund Accounting and Financial Reporting with First Chicago NBD January
1996 through October 1998.
|
|
|
|
|
|
|
|
Brian
D. Risinger, Born: 1968
|
|
December
1, 2007
|
|
Assistant
Treasurer
|
|
|
|
Director
of Compliance and Administration of Diamond Hill Investment Group, Inc.,
since May 2006; Director of Compliance and Director of Fund Administration
with BISYS Fund Services April 1994 through April 2006.
|
|
|
|
1
|
The
business address for all Directors and Officers is 325 John H McConnell
Blvd., Columbus, OH, 43215.
|
|
2
|
Each
Director and Officer serves until resignation, retirement age or until his
or her successor is elected.
|
NOTICE OF
PRIVACY POLICY
In order
to enhance our ability to provide you with the best service possible, the
Diamond Hill Financial Trends Fund (referred to as “we” or “us”) collects, uses
and shares certain information about you. This policy explains what information
we collect and with whom we share it. The practices described in this policy are
applicable to all customers, including prospective, current and former
customers. The policy also explains how we protect the security and
confidentiality of certain customer information. We make reference to our
“affiliates” in this policy. Affiliates are companies related to us by common
control, including Diamond Hill Capital Management, Inc., Diamond Hill
Investment Group, Inc., Beacon Hill Fund Services, Inc. and BHIL Distributors,
Inc.
SAFEGUARDING
PRIVACY
We
maintain physical, electronic and procedural safeguards that comply with federal
standards to ensure the safety of non-public personal customer
information.
INFORMATION
WE COLLECT AND SOURCES OF INFORMATION
We may
collect information about our customers to help identify you, evaluate your
application, service and manage your account and offer services and products you
may find valuable. We collect this information from a variety of sources
including:
|
•
|
Information
we receive from you on applications or other forms (e.g. your name,
address, date of birth, social security number and investment
information).
|
|
•
|
Information
about your transactions and experiences with us and our affiliates (e.g.
your account balance, transaction history and investment selections);
and
|
|
•
|
Information
we obtain from third parties regarding their brokerage, investment
advisory, custodial or other relationship with you (e.g. your account
number, account balance and transaction
history).
|
INFORMATION
WE SHARE WITH SERVICE PROVIDERS
We may
disclose all non-public personal information we collect, as described above, to
companies (including affiliates) that perform services on our behalf, including
those that assist us in responding to inquiries, processing transactions,
preparing and mailing account statements and other forms of shareholder services
provided they use the information solely for these purposes and they enter into
a confidentiality agreement regarding the information.
INFORMATION
WE SHARE WITH AFFILIATES
Our
affiliates are financial service providers that offer investment advisory and
other financial services. In addition to the information we share with
affiliates that provide services to us, we may share information among our
affiliates to better assist you in achieving your financial goals.
PRIVACY
PROMISE FOR CUSTOMERS
We will
safeguard, according to federal standards of security and confidentiality, any
non-public personal information our customers share with us.
We will
limit the collection and use of non-public customer information to the minimum
necessary to deliver superior service to our customers which includes advising
our customers about our products and services and to administer our
business.
We will
permit only authorized employees who are trained in the proper handling of
non-public customer information to have access to that information.
We will
not reveal non-public customer information to any external organization unless
we have previously informed the customer in disclosures or agreements, have been
authorized by the customer or are required by law or our
regulators.
We value
you as a customer and take your personal privacy seriously. We will inform you
of our policies for collecting, using, securing and sharing non-public personal
information the first time we do business and every year that you are a customer
of The Diamond Hill Financial Trends Fund or anytime we make a material change
to our privacy policy.
The Fund
’
s proxy voting policies, procedures and
recor
ds are available
without charge, upon request:
|
By phone
|
On
the Fund
’
s
Web site
|
On
the SEC
’
s
Web site
|
|
1-614-255-4080
|
www.diamond-hill.com/closedendfund.asp
|
www.sec.gov
|
|
|
|
|
|
|
|
|
|
Dir
ectors
|
Investment
adviser
|
In
dependent
directors
’
|
|
Franklin C. Go
lden
|
Diamond
Hi
ll
Capital
Management, Inc.
|
Counsel
|
|
Russell J.
Page
|
325 John H.
McConnell Boulevard, Suite 200
|
Paul, Hastings,
Janofsky
|
|
Fred G. Steingra
ber
|
Columbus, Ohio
43215
|
& Walker,
LLP
|
|
Donald R.
Tomlin
|
|
600
Peachtre
e St., N.E
.
|
|
|
Custodian
|
Twenty
–
Fourth
Floor
|
|
Officers
|
JP Morgan Chase
Bank, N.A .
|
Atlanta, GA
30308
|
|
Franklin C.
Golden
|
14201 North
Da
ll
as
Parkway
|
|
|
Chair
man
|
Dallas, TX
75254
-2
916
|
Sto
ck
symbol
|
|
James Laird
|
|
Lis
ted Nasdaq
Symbol:
|
|
President
|
Transfer
agent
and registrar
|
DHFT
|
|
Gary Young
|
Mellon Investor
Services
|
|
|
Treasurer , CCO,
Secreta
ry
|
Newport
Offi
ce Center
VII
|
For
shareholder
assis
ta
nce,
|
|
Brian Risin
ger
|
480 Washington
Boulevard
|
refer to page
21
|
|
Assistant Treasu
rer
|
J
ersey
Cit
y, NJ
07310
|
|
|
|
|
|
How to contact
us
|
|
|
Internet
|
www.diamond-hil
l.
com
|
|
|
Mail
|
Me
ll
on
Investo
r
Center
|
|
|
|
Newport Office
Center VII
|
|
|
|
480 Washington
Boule
vard
|
|
|
|
Jersey City , NJ
07310
|
|
|
Phone
|
Customer service
re
presenta
tives
|
1-877-254-8583
|
|
|
Informatio
n
Line
|
1-614-255-4080
|
A lis
ting
of month-end portfolio
holdings
i
s
available
on our Web site,
www.diamond-hill.c
om.
Additionally portfolio holdings ar
e available on a quarterly basis 60 days
after the fi
scal quarter
on our We
b site or upon re
quest by ca
ll
ing 1-614-25
5-4080, or on the SEC
’
s Web sit
e, www.sec.gov.
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