United States
Securities And Exchange Commission
Washington, D.C. 20549
FORM N-CSR
|
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
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Investment Company Act file number
811-05734
Diamond Hill Financial Trends Fund, Inc.
(Exact name of registrant as specified in charter)
325 John H. McConnell Boulevard, Suite 200, Columbus, Ohio 43215
(Address of principal executive offices)(Zip code)
James F. Laird, Jr., 325 John H. McConnell Boulevard, Suite 200, Columbus, Ohio 43215
(Name and address of agent for service)
Registrants telephone number, including area code:
(614) 255-3333
Date of fiscal year end:
12/31
Date of reporting period:
12/31/10
Form N-CSR is to be used by management investment companies to file reports with the Commission not
later than 10 days after the transmission to stockholders of any report that is required to be
transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR
270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory,
disclosure review, inspection and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR, and the Commission
will make this information public. A registrant is not required to respond to the collection of
information contained in Form N-CSR unless the Form displays a currently valid Office of Management
and Budget (OMB) control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the burden to Secretary,
Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has
reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.
Item 1. Reports to Stockholders.
Annual Report
December 31, 2010
|
TABLE OF CONTENTS
Welcome
Dear Fellow Shareholders:
Once again, we are pleased to report that after a volatile first half,
2010 ended up being a very positive year for the equity markets as a
whole and for the financial services sector. Much like the prior year,
the small and mid-cap portions of the market led the way. The Diamond
Hill Financial Trends Fund generated an 18.27% return, at net asset
value, in 2010, while the S&P 1500 SuperComposite Financials Index
returned 13.35% for the period.
While the first eight months of the year gave us another dose of
volatility, we saw only slight gains for the U.S. stock market. However,
the overall environment improved substantially as we entered the fall
season and especially in the month of December. The strong finish may
largely be explained by an improving outlook for the domestic economy.
Increased clarity on bank capital requirements, as well as lessening
concerns over the European debt crises, provided additional tailwinds
for the equity market and, in particular, the financial sector.
With this backdrop, we remain positive regarding the outlook for
financial stocks heading into the new year. Since the market lows in
March of 2009, financial stocks have been strong performers, yet still
have substantially lagged the overall market during the past five years.
We believe many areas within the sector are now well positioned for
secular growth and nearly all seem poised to benefit from
a cyclical recovery. As we begin 2011, for the first time in a number of
years, it now appears that balance sheets within the sector are
generally healthy, while near-term operating fundamentals are steadily
improving for most financial companies. At the same time, we also remain
confident in the long-term outlook for many of the areas within the
sector and particularly so for the most outstanding financial services
organizations, many of which are represented in the portfolio.
Therefore, we begin 2011 with optimism for continued cyclical recovery
in the financial sector, as well as our unwavering commitment to the
long-term stewardship of shareholders capital. As a reminder, the
Funds adviser utilizes a long-term investment horizon, purchasing
securities priced at a discount to their appraisal of intrinsic value.
As always, on behalf of your Board of Directors, I would like to thank
you for your interest in the Fund.
Sincerely,
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.
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Over the last year
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Ø
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The Fund appreciated 18.27% on a net asset value basis, outperforming the
S&P 1500 Super Composite Financials Index, which was up 13.29%.
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Ø
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Public equity markets recovered strongly in the second half of the year to
finish the year with a double-digit price gain.
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Ø
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Economic growth prospects improved during the year and uncertainties
surrounding financial regulatory reform abated somewhat as new capital
rules were announced.
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Ø
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Many of the Funds long positions appreciated as the environment became more
favorable for financial companies, narrowing the gaps between price and
value.
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Diamond Hill Financial Trends Fund, Inc.
Funds average annual total returns for various periods ended December 31, 2010
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 holding
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Wells Fargo & Co.
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7.3
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%
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PNC Financial Services Group, Inc.
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3.6
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%
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JPMorgan Chase & Co.
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6.9
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%
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Bank of New York Mellon Corp.
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3.5
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%
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Assured Guaranty Ltd.
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4.5
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%
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Prudential Financial, Inc.
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3.4
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%
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U.S. Bancorp
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4.4
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%
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Bank of America Corp.
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3.1
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%
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Old Republic International Corp.
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4.0
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%
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Travelers Cos., Inc., The
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2.8
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%
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As a percentage of net assets on December 31, 2010 and excludes any cash equivalents.
1
Portfolio Commentary
Along with the overall domestic equity markets, 2010 was another very solid year
for the Fund. The portfolio produced an 18.27% total return, at net asset value,
as it once again benefited from a heavy long bias maintained throughout the year.
The Funds primary benchmark (S&P 1500 SuperComposite Financials Index) posted a
total return of 13.35%, which modestly lagged the broader U.S. equity indices.
The past year marked the fourth consecutive year that the overall financial
sector trailed the market; however, the BKX (KBW Bank Index) was finally able to
break its six year streak of relative underperformance.
In general, we continue to believe that the financial services sector is poised
for solid returns on both an absolute and relative basis. After three years of
struggling with credit and capital issues, we believe most industries within the
sector are now well positioned for the economic recovery, which appears to be
gaining momentum. Specifically, capital levels in virtually all areas of the
sector, but most importantly the banking industry, have increased once again over
the past year. Balance sheets have generally shrunk, while at the same time, many
participants retained the vast majority of their earnings. Meanwhile, the private
sector continued to provide new common equity capital to allow for opportunistic
growth and/or the repayment of TARP obligations. In addition, the industry gained
needed clarity on prospective capital requirements during the year, and it now
appears most of the larger domestic institutions are ready to meet and even exceed
the capital requirements well in advance of the regulatory guidelines. As
importantly, we also saw a continuation of the more benign trend in loan losses
and securities impairments. In many instances, credit expenses actually turned
into a healthy tailwind. Finally, the significantly more constructive state of the
capital markets was also quite beneficial to nearly the entire sector, from both a
general business as well as a capital cost perspective.
As we noted last year, we value stocks using a long time horizon and estimates of
normalized earnings. Once again, the combination of improving underlying business
fundamentals, along with still modest valuations, led us to numerous undervalued
situations and therefore a continuation of the heavy long bias in the portfolio.
In particular, we continued to hold investments in companies which we believe
have been able to substantially improve their competitive position during the
recent economic/credit cycle. At the larger end of the market capitalization
spectrum, examples would be two long-time holdings, Wells Fargo & Co. and U.S.
Bancorp, as well as J.P. Morgan Chase & Co. and PNC Financial Services Group,
Inc. We also added to smaller capitalization banks and thrifts that we believe
are similarly positioned to succeed. Most of these organizations have been the
beneficiaries of forced mergers and/or FDIC assisted transactions and should be
well positioned coming out of the recession. In addition, we continued to find
value in a number of insurance companies with Assured Guaranty Ltd., Old Republic
International Corp., Prudential Financial Inc. and The Travelers Cos., Inc. all
in the top ten holdings at year end. These companies generally experienced
fundamental pressures relatively early in the cycle due to exposure to real
estate related assets and/or broad exposure to the equity markets. At the end of
2010, these organizations displayed sound balance sheets with strong capital
levels and were, without exception, operationally poised to add profitable market
share in their respective business lines. Finally, we continue to expect
increased M&A activity in the near-term and believe this will be an essential
component of capacity rationalization and efficiency gains across the key
industries within the sector.
2
In terms of contributions to performance, the significant holdings were primarily a few
of the larger positions in the banking and insurance industries. In addition, a preferred
security issued by specialty commercial mortgage REIT, iStar Financial, generated a very
strong total return for the year. In the insurance industry, Old Republic International
Corp., Assurant, Inc. and Horace Mann Educators Corp. were the strongest contributors,
while Wells Fargo & Co, Huntington Bancshares, Inc. and U.S. Bancorp were the three
largest contributors in our banking industry holdings. We were pleased that the short
portfolio was only a very modest detractor in total during the strong up year for the
financial sector. Prosperity Bancshares, Inc. and KBW, Inc. were the largest positive
contributors to performance in the short portfolio. Assured Guaranty Ltd. and Bank of
America Corp. were meaningful detractors on the long side, while M&T Bank and Eagle
Bancorp Inc. were the most significant detractors on the short side.
Finally, as we frequently like to mention, we firmly believe shareholders in the Fund
will benefit from a relatively concentrated portfolio. We also continue to have confidence
that our flexibility to short securities will provide clear long-term benefits as our
primary objective is to enhance performance.
As always, we would like to thank our shareholders for their continued support of the Fund.
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Christopher M. Bingaman, CFA
|
|
Austin Hawley, CFA
|
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John Loesch, CFA
|
Portfolio Manager
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Assistant Portfolio Manager
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Assistant Portfolio Manager
|
Diamond Hill Financial Trends Fund, Inc.
3
Diamond Hill Financial Trends Fund, Inc.
Schedule of Investments
December 31, 2010
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Fair
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Shares
|
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Value
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Preferred Stocks 3.7%
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Banking Services 0.9%
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|
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Citizens Funding Trust I, 7.50%*
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25,940
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$
|
411,408
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Financial Services 1.4%
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Countrywide Capital V, 7.00%
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26,000
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639,600
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Reits & Real Estate Management 1.4%
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|
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iStar Financial, Inc., Series F, 7.80%
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36,660
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648,882
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Total Preferred Stocks
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|
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$
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1,699,890
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Common Stocks 84.2%
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Banking Services 25.0%
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BB&T Corp.
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12,907
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339,325
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City National Corp.
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6,100
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|
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|
374,296
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First California Financial Group, Inc.*
|
|
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110,350
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|
|
|
308,980
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First Financial Holdings, Inc.
|
|
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48,888
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|
|
|
562,701
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|
First Niagara Financial Group, Inc.
à
|
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|
45,325
|
|
|
|
633,643
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|
First of Long Island Corp.
à
|
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|
27,056
|
|
|
|
782,189
|
|
Huntington Bancshares, Inc.
|
|
|
125,055
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|
|
|
859,128
|
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National Penn Bancshares, Inc.
à
|
|
|
85,930
|
|
|
|
690,018
|
|
NewBridge Bancorp*
|
|
|
47,512
|
|
|
|
221,406
|
|
PNC Financial Services Group, Inc.
|
|
|
26,850
|
|
|
|
1,630,332
|
|
Popular, Inc.*
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|
|
295,125
|
|
|
|
926,693
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Sterling Bancorp
à
|
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21,465
|
|
|
|
224,739
|
|
SunTrust Banks, Inc.
|
|
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17,350
|
|
|
|
511,998
|
|
Wells Fargo & Co.
§
|
|
|
107,800
|
|
|
|
3,340,722
|
|
|
|
|
|
|
|
|
|
11,406,170
|
|
|
Commercial Banks 4.4%
|
|
|
|
|
|
|
|
|
U.S. Bancorp
|
|
|
75,199
|
|
|
|
2,028,117
|
|
|
Consumer Financial Services 4.2%
|
|
|
|
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|
|
|
|
American Express Co.
|
|
|
19,770
|
|
|
|
848,528
|
|
Discover Financial Services
|
|
|
57,145
|
|
|
|
1,058,897
|
|
|
|
|
|
|
|
|
|
1,907,425
|
|
|
Financial Services 16.9%
|
|
|
|
|
|
|
|
|
Bank of America Corp.
|
|
|
105,660
|
|
|
|
1,409,504
|
|
Bank of New York Mellon Corp.
§
|
|
|
53,008
|
|
|
|
1,600,842
|
|
JPMorgan Chase & Co.
§
|
|
|
74,528
|
|
|
|
3,161,478
|
|
Morgan Stanley
|
|
|
23,670
|
|
|
|
644,061
|
|
MVC Capital, Inc.
à
|
|
|
15,165
|
|
|
|
221,409
|
|
State Street Corp.
|
|
|
14,289
|
|
|
|
662,152
|
|
|
|
|
|
|
|
|
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7,699,446
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4
Diamond Hill Financial Trends Fund, Inc.
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See notes to financial statements
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Shares/
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Fair
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Par Value
|
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Value
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Insurance 30.3%
|
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Alleghany Corp.*
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1,056
|
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|
$
|
323,527
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Allstate Corp.
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|
36,000
|
|
|
|
1,147,680
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Arch Capital Group Ltd.*
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|
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7,135
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|
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|
628,237
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Assurant, Inc.
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31,370
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|
1,208,372
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Assured Guaranty Ltd.
|
|
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115,911
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|
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2,051,625
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Chubb Corp., The
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|
|
5,570
|
|
|
|
332,195
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Hartford Financial Services Group, Inc.
|
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33,262
|
|
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|
881,110
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HCC Insurance Holdings, Inc.
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|
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15,265
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|
|
|
441,769
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|
Horace Mann Educators Corp.
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32,512
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586,517
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Marsh & McLennan Cos., Inc.
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12,410
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339,289
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Old Republic International Corp.
à
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135,480
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1,846,592
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Prudential Financial, Inc.
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26,740
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1,569,905
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Travelers Cos., Inc., The
§
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22,780
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1,269,074
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XL Group plc
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55,145
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1,203,264
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13,829,156
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IT Services 1.4%
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CoreLogic, Inc.
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33,375
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618,105
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Reits & Real Estate Management 2.0%
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Redwood Trust, Inc. REIT
à
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62,285
|
|
|
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929,915
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Total Common Stocks
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$
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38,418,334
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Corporate Bond 1.0%
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Banking Services 1.0%
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Zions Bancorp., 7.75%, 9/23/14
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$
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415,000
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$
|
432,642
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Repurchase Agreement 3.2%
|
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BNP Paribas Securities Corp.,
0.17%,
Agreement dated 12/31/10 to be
repurchased at $1,457,278
on 1/3/11. Repurchase agreement is fully
collateralized
by various U.S. Government Agency securities
with a range of rates from 0.0% 6.3%,
and maturities
from 1/12/2011 through 6/5/2036
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$
|
1,457,257
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|
|
$
|
1,457,257
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|
|
|
|
|
See notes to financial statements
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Diamond Hill Financial Trends Fund, Inc.
5
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Fair
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Shares
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Value
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Registered Investment Company 11.8%
|
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JPMorgan
U.S. Government Money Market Fund, Capital Shares
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5,362,415
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$
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5,362,415
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Total Investment Securities 103.9%
(Cost $39,472,318)**
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$
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47,370,538
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Segregated Cash With Brokers 7.4%
|
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|
3,392,563
|
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|
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|
Securities Sold Short (7.6)%
(Proceeds $3,281,833)
|
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(3,456,711
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)
|
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|
Net Other Assets (Liabilities) (3.7%)
|
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|
|
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(1,685,224
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)
|
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|
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Net Assets 100.0%
|
|
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|
|
$
|
45,621,166
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*
|
|
Non-income producing security.
|
|
**
|
|
Represents cost for financial reporting purposes.
|
|
à
|
|
All or a portion of the security is on loan. The total market
value of the securities on loan, as of December 31, 2010, was $1,390,204.
|
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|
This security, which was purchased using cash collateral received
from securities on loan, represents collateral for securities loaned as of
December 31, 2010.
|
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§
|
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Security position is either entirely or partially held in a segregated
account as collateral for securities sold short and aggregates to a total
market value of $3,414,242.
|
REIT Real Estate Investment Trust
|
|
|
6
Diamond Hill Financial Trends Fund, Inc.
|
|
See notes to financial statements
|
Diamond Hill Financial Trends Fund, Inc.
Schedule of Securities Sold Short
December 31, 2010
|
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|
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Fair
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Shares
|
|
Value
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Common Stocks 7.6%
|
|
|
|
|
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|
Banking Services 7.1%
|
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|
Eagle Bancorp, Inc.*
|
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|
48,730
|
|
|
$
|
703,174
|
|
First Bancorp
|
|
|
56,235
|
|
|
|
860,958
|
|
First Financial Bankshares, Inc.
|
|
|
11,280
|
|
|
|
577,310
|
|
United Bankshares, Inc.
|
|
|
22,820
|
|
|
|
666,344
|
|
WesBanco, Inc.
|
|
|
11,575
|
|
|
|
219,462
|
|
Westamerica Bancorp.
|
|
|
3,850
|
|
|
|
213,560
|
|
|
|
|
|
|
|
|
|
3,240,808
|
|
|
Financial Services 0.5%
|
|
|
|
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|
Moodys Corp.
|
|
|
8,135
|
|
|
|
215,903
|
|
|
|
Total Common Stocks Sold Short
|
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|
|
|
|
|
|
|
(Proceeds $3,281,833)
|
|
|
|
|
|
$
|
3,456,711
|
|
|
|
|
|
*
|
|
Non-dividend expense producing security.
|
Percentages disclosed are based on total net assets of the Fund at December 31, 2010.
|
|
|
See notes to financial statements
|
|
Diamond Hill Financial Trends Fund, Inc.
7
|
Financial Statements
Statement of Assets and Liabilities December 31, 2010
This Statement of Assets and Liabilities is the Funds balance sheet. It shows the
value of what the Fund owns, is due and owes. Youll also find the net asset value
for each common share.
|
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|
|
Assets
|
|
|
|
|
|
Investments,
at fair value (cost $39,472,318) including $1,390,204 of securities loaned
|
|
$
|
47,370,538
|
|
Deposit with broker for securities sold short
|
|
|
3,392,563
|
|
Cash
|
|
|
1,890
|
|
Receivable for investments sold
|
|
|
85,859
|
|
Receivable for dividends and interest
|
|
|
51,716
|
|
Prepaid assets
|
|
|
12,275
|
|
|
|
|
|
|
Total assets
|
|
|
50,914,841
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Securities sold short, at value (proceeds $3,281,833)
|
|
|
3,456,711
|
|
Return of collateral for securities on loan
|
|
|
1,457,257
|
|
Payable for securities purchased
|
|
|
272,313
|
|
Payable to Investment Adviser
|
|
|
25,227
|
|
Payable for dividends on securities sold short
|
|
|
13,286
|
|
Payable to Administrator
|
|
|
5,698
|
|
Other payables and accrued expenses
|
|
|
63,183
|
|
|
|
|
|
|
Total liabilities
|
|
|
5,293,675
|
|
|
|
|
|
|
Net Assets
|
|
|
|
|
|
Capital paid-in
|
|
|
39,977,745
|
|
Accumulated net investment income
|
|
|
45,274
|
|
Accumulated net realized loss on investments
|
|
|
(2,125,195
|
)
|
Net unrealized appreciation on investments
|
|
|
7,723,342
|
|
|
|
|
|
|
Net assets
|
|
$
|
45,621,166
|
|
|
|
|
|
|
Net asset value per share
|
|
|
|
|
|
Based on 3,968,124 shares outstanding 50 million shares
authorized with par value of $0.001 per share
|
|
$
|
11.50
|
|
|
|
|
8
Diamond Hill Financial Trends Fund, Inc.
|
|
See notes to financial statements
|
Statement of Operations For the year ended December 31, 2010
This Statement of Operations summarizes the Funds investment income earned and expenses incurred
in operating the Fund. It also shows net gains (losses) for the period stated.
|
|
|
|
|
Investment income
|
|
|
|
|
|
|
|
|
|
Dividends
|
|
$
|
688,232
|
|
Interest
|
|
|
69,347
|
|
Securities lending
|
|
|
7,529
|
|
|
|
|
|
|
Total investment income
|
|
|
765,108
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
Investment management fees
|
|
|
276,136
|
|
Administration fees
|
|
|
63,724
|
|
Custodian fees
|
|
|
20,646
|
|
Directors fees
|
|
|
76,499
|
|
Professional fees
|
|
|
47,801
|
|
Regulatory fees
|
|
|
17,500
|
|
Transfer agent fees
|
|
|
14,615
|
|
Postage and printing fees
|
|
|
9,999
|
|
Dividend expense on securities sold short
|
|
|
64,631
|
|
Insurance
|
|
|
10,081
|
|
|
|
|
|
|
Total expenses
|
|
|
601,632
|
|
|
|
|
|
|
Net investment income
|
|
|
163,476
|
|
|
|
|
|
|
Realized and unrealized gain (loss)
|
|
|
|
|
|
|
|
|
|
Net realized gain (loss) on
|
|
|
|
|
Security sales
|
|
|
4,157,639
|
|
Closed short positions
|
|
|
239,849
|
|
Change in net unrealized appreciation
(depreciation) of
|
|
|
|
|
Investments
|
|
|
2,684,920
|
|
Securities sold short
|
|
|
(251,006
|
)
|
|
|
|
|
|
Net realized and unrealized gain
|
|
|
6,831,402
|
|
|
|
|
|
|
Increase in net assets from operations
|
|
$
|
6,994,878
|
|
|
|
|
|
|
|
See notes to financial statements
|
|
Diamond Hill Financial Trends Fund, Inc.
9
|
Statements of Changes in Net Assets
These Statements of Changes in Net Assets show how the value of the Funds 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
|
|
Year
|
|
|
Ended
|
|
Ended
|
|
|
December 31,
|
|
December 31,
|
|
|
2010
|
|
2009
|
Increase (decrease) in net assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From operations
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
163,476
|
|
|
$
|
720,498
|
|
Net realized gain (loss) from security sales
|
|
|
4,157,639
|
|
|
|
(4,238,919
|
)
|
Net realized gain from closed short positions
|
|
|
239,849
|
|
|
|
1,440,059
|
|
Change in net unrealized appreciation (depreciation)
|
|
|
2,433,914
|
|
|
|
9,237,714
|
|
|
|
|
|
|
|
|
|
|
Increase in net assets resulting from operations
|
|
|
6,994,878
|
|
|
|
7,159,352
|
|
|
|
|
|
|
|
|
|
|
Distributions to common shareholders
|
|
|
|
|
|
|
|
|
From net investment income
|
|
|
(348,401
|
)
|
|
|
(1,317,759
|
)
|
From net realized gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in net assets from distributions
to common shareholders
|
|
|
(348,401
|
)
|
|
|
(1,317,759
|
)
|
|
|
|
|
|
|
|
|
|
From Capital Share Transactions
|
|
|
|
|
|
|
|
|
Repurchase of Shares (25,000 shares)
|
|
|
(237,380
|
)
|
|
|
|
|
Net Decrease in Net Assets from Capital Share Transactions
|
|
|
(237,380
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
39,212,069
|
|
|
|
33,370,476
|
|
End of period
|
|
$
|
45,621,166
|
|
|
$
|
39,212,069
|
|
|
|
|
|
|
|
|
|
|
Accumulated net investment income
|
|
$
|
45,274
|
|
|
$
|
232,608
|
|
|
|
|
|
|
|
10
Diamond Hill Financial Trends Fund, Inc.
|
|
See notes to financial statements
|
Financial Highlights
The Financial Highlights shows how the Funds net asset value for a share has changed since the end
of the previous period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
Per share operating performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
|
$
|
9.82
|
|
|
$
|
8.36
|
|
|
$
|
15.73
|
|
|
$
|
21.25
|
|
|
$
|
19.46
|
|
Net investment income
1
|
|
|
0.04
|
|
|
|
0.18
|
|
|
|
0.38
|
|
|
|
0.28
|
|
|
|
0.25
|
|
Net realized and unrealized
gain (loss) on investments
|
|
|
1.73
|
|
|
|
1.61
|
|
|
|
(7.33
|
)
|
|
|
(3.31
|
)
|
|
|
2.69
|
|
Total from investment operations
|
|
|
1.77
|
|
|
|
1.79
|
|
|
|
(6.95
|
)
|
|
|
(3.03
|
)
|
|
|
2.94
|
|
Less distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From net investment income
|
|
|
(0.09
|
)
|
|
|
(0.33
|
)
|
|
|
(0.10
|
)
|
|
|
(0.28
|
)
|
|
|
(0.26
|
)
|
From net realized gain
|
|
|
|
|
|
|
|
|
|
|
(0.32
|
)
|
|
|
(2.21
|
)
|
|
|
(0.89
|
)
|
Total distributions
|
|
|
(0.09
|
)
|
|
|
(0.33
|
)
|
|
|
(0.42
|
)
|
|
|
(2.49
|
)
|
|
|
(1.15
|
)
|
Net asset value, end of period
|
|
$
|
11.50
|
|
|
$
|
9.82
|
|
|
$
|
8.36
|
|
|
$
|
15.73
|
|
|
$
|
21.25
|
|
Per share market value, end of period
|
|
$
|
9.81
|
|
|
$
|
7.88
|
|
|
$
|
6.35
|
|
|
$
|
13.75
|
|
|
$
|
19.01
|
|
Total return at net asset value
2
(%)
|
|
|
18.27
|
|
|
|
22.67
|
|
|
|
(44.30
|
)
|
|
|
(12.50
|
)
|
|
|
15.92
|
3
|
Total return at market value
2
(%)
|
|
|
25.72
|
|
|
|
29.60
|
|
|
|
(51.60
|
)
|
|
|
(14.50
|
)
|
|
|
20.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios and supplemental data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets, end of period (in millions)
|
|
$
|
46
|
|
|
$
|
39
|
|
|
$
|
33
|
|
|
$
|
63
|
|
|
$
|
85
|
|
Ratio of gross expenses to average
net assets (%)
|
|
|
1.42
|
|
|
|
1.64
|
|
|
|
1.53
|
|
|
|
1.30
|
|
|
|
1.21
|
|
Ratio of net expenses to average
net assets (%)
|
|
|
1.42
|
|
|
|
1.32
|
|
|
|
1.26
|
|
|
|
1.28
|
|
|
|
1.21
|
|
Ratio of net expenses to average
net assets, excluding dividends on
securities sold short (%)
|
|
|
1.26
|
|
|
|
1.15
|
|
|
|
1.15
|
|
|
|
|
|
|
|
|
|
Ratio of net investment income
to average net assets (%)
|
|
|
0.38
|
|
|
|
2.21
|
|
|
|
3.09
|
|
|
|
1.36
|
|
|
|
1.21
|
|
Portfolio turnover (%)
|
|
|
51
|
|
|
|
81
|
|
|
|
65
|
|
|
|
42
|
|
|
|
10
|
|
|
|
|
1
|
|
Based on the average of the shares outstanding.
|
|
2
|
|
Total return based on net asset value reflects changes in the Funds 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 Funds
shares traded during the year.
|
|
3
|
|
Unaudited.
|
|
|
|
|
|
|
See notes to financial statements
|
|
Diamond Hill Financial Trends Fund, Inc.
11
|
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 Funds 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 1940 Act.
|
|
|
|
|
|
12
Diamond Hill Financial Trends Fund, Inc.
|
|
See notes to financial statements
|
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.
The following is a summary of the inputs used to value the Funds net assets as of December 31,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2
|
|
|
|
|
|
|
Other
|
|
|
Level 1
|
|
Significant
|
|
|
Quoted
|
|
Observable
|
|
|
Prices
|
|
Inputs
|
|
Investments in Securities:
|
|
|
|
|
|
|
|
|
(Assets)
|
|
|
|
|
|
|
|
|
Common Stocks*
|
|
$
|
38,418,334
|
|
|
$
|
|
|
Preferred Stocks*
|
|
|
1,699,890
|
|
|
|
|
|
Corporate Bonds*
|
|
|
|
|
|
|
432,642
|
|
Registered Investment
Companies
|
|
|
5,362,415
|
|
|
|
|
|
Repurchase
Agreements
|
|
|
|
|
|
|
1,457,257
|
|
|
Total
|
|
$
|
45,480,639
|
|
|
$
|
1,889,899
|
|
Investment in Securities Sold Short:
|
|
|
|
|
|
|
|
|
(Liabilities)
|
|
|
|
|
|
|
|
|
Common Stocks*
|
|
$
|
(3,456,711
|
)
|
|
$
|
|
|
|
|
|
*
|
|
See Schedule of Investments and Schedule of Securities Sold Short for industry classification.
|
There were no significant transfers in and out of Levels 1, 2, or 3 during the year ended December
31, 2010 and the Fund held no Level 3 securities at December 31, 2010.
New Accounting Pronouncement
In January 2010, the FASB issued new guidance as an amendment to fair value measurements and
disclosures. The new guidance adds new requirements for disclosure about transfers into and out of
level 1 and level 2 fair value measurements and separate disclosures about purchases, sales,
issuances, and settlements relating to level 3 measurements. The guidance also clarifies existing
fair value disclosures about the level of disaggregation and about input and valuation techniques
in level 2 and level 3 fair value measurements. The Fund has adopted this
amendment.
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 Advisers 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
|
|
|
|
|
|
See notes to financial statements
|
|
Diamond Hill Financial Trends Fund, Inc.
13
|
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 borrowers 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.
As of December 31, 2010, the value of securities loaned and the collateral held were as follows:
|
|
|
Fair Value
|
|
Fair Value of
|
of Securities
|
|
Collateral
|
Loaned
|
|
Received
|
|
$1,390,204
|
|
$1,457,257
|
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, 2007 through 2010) 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 Funds 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
Funds assets; continuous review, supervision, and administration of the investment program of the
Fund and provides office space, furnishings and equipment used to carryout the investment
management of the Fund. For these services, the Adviser receives a fee at an annual rate of 0.65%
of the Funds average weekly net asset value, or
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14
Diamond Hill Financial Trends Fund, Inc.
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See notes to financial statements
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a flat annual fee of $50,000, whichever is higher. If total Fund expenses exceed 2% of the Funds
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.
Pursuant to the Expense
Limitation Agreement (Limitation Agreement), 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 Limitation Agreement will continue until December 31, 2011.
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 Funds net assets value, the maintenance of the books and records of the Fund; prepare the
financial information for the Funds proxy statements, if required, and semi-annual and annual
reports to shareholders; prepare the Funds 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 0.15% of the Funds average
weekly assets or $22,000, 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 Funds
arrangement with the custodian.
The Fund does not pay remuneration to its Officers. Certain Officers of the Fund are employees of
the Adviser.
Directors Fees
The Chairman of the Board of Directors receives an annual retainer of $16,000. Each additional
Independent Board member receives an annual retainer of $10,000. The meeting attendance fee is
$1,250 per Director for each quarterly in-person meeting. The Fund paid $66,000 in aggregate
directors fees during the year ended December 31, 2010.
Note 3
Guarantees and indemnifications
Under the Funds 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 Funds 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 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 Funds shares are trading at a discount from the net asset value, to
consider the making of tender offers. The
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See notes to financial statements
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Diamond Hill Financial Trends Fund, Inc.
15
|
Board may at any time, however, decide that the Fund should not make share repurchases or tender
offers.
During the fiscal year ended December 31, 2010, the Fund repurchased 25,000 (0.63% of shares
outstanding) of its shares under the share repurchase program authorized by the Board of Directors.
The corresponding dollar amount of the share repurchase amounted to $237,380 with a weighted
average price per share of $9.50 and a weighted average discount per share at 16.5%.
Note 5
Share Repurchase Plan
On December 15, 2009, the Board of Directors authorized a share repurchase plan. Under the share
repurchase plan, the Fund may purchase in the open market up to 200,000 of its outstanding shares
and is effective until the earlier of its termination by vote of the Directors or the repurchase of
200,000 shares. The share repurchase program is intended to increase the Funds net asset value per
share of the Funds remaining shares.
Note 6
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 fiscal year ended December 31, 2010, aggregated
$19,880,764 and $22,554,152, respectively.
Note 7
Federal Tax Information
The amount and character of income and capital gain distributions paid by the Fund are determined
in accordance with Federal income tax regulations which may differ from GAAP. The tax character of
distributions paid may differ from the character of distributions shown on the Statements of
Changes in Net Assets due primarily to short-term capital gains being treated as ordinary income
for tax purposes.
The tax character of dividends paid to shareholders during 2010 and 2009 was as follows:
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Ordinary
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Long-Term
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Income
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Gains
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Total
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2010
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$
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348,401
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$
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$
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348,401
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2009
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1,317,759
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1,317,759
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The following information is computed on a tax basis for each item of the Fund as of December 31,
2010:
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Tax cost of portfolio investments
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$
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39,774,464
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Gross unrealized appreciation
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8,795,400
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Gross unrealized depreciation
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(1,374,204
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)
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Net unrealized appreciation
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7,421,196
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Undistributed ordinary Income
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4,751
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Capital loss carryforwards
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(1,782,526
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)
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Accumulated earnings
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5,643,421
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As of December 31, 2010, the Fund had net capital loss carryforwards expiring as follows:
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Expires
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Amount
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December 31,
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1,782,526
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2017
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The Fund utilized $4,388,838 of capital losses in the current fiscal year.
Certain reclassifications have been made to the components of net assets, the result of investments
in Real Estate Investment Trusts. The following reclassifications have no impact on the net assets
or net asset value per share of the Fund and are designed to present the Funds capital accounts on
a tax basis:
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Accumulated
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Net Investment
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Paid in
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Income
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Capital
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$(2,409)
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$2,409
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The
Regulated Investment Company Modernization Act of 2010 (the Act) was enacted on December
22, 2010. The Act makes changes to several tax rules impacting the Fund. In general, the provisions
of the Act will be effective for the Funds fiscal year
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16
Diamond Hill Financial Trends Fund, Inc.
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See notes to financial statements
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ending December 31, 2011. Although the Act provides several benefits, including the unlimited
carryover of future capital losses, there may be a greater likelihood that all or a portion of the
funds pre-enactment capital loss carryovers may expire without being utilized due to the fact that
post-enactment capital losses get utilized before pre-enactment capital loss carryovers. Relevant
information regarding the impact of the Act on the Fund, if any, will be contained within the
Federal Tax Information section of the notes to financial statements beginning in 2011
reporting periods.
Note 8
Subsequent Events
The Fund evaluated subsequent events from December 31, 2010 through the date of these financial
statements were issued. There were no subsequent events to report that would have a material impact
on the financial statements.
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See notes to financial statements
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Diamond Hill Financial Trends Fund, Inc.
17
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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, 2010, and
the related statement 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 four years in the period then ended. These financial statements and financial highlights are
the responsibility of the Funds management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits. The financial highlights for the
year 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 Funds 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 Funds 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, 2010, by correspondence with the custodian and
brokers or by other auditing procedures where replies from brokers were not received. 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, 2010, 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 four years in the period then ended, in conformity with U.S. generally accepted accounting
principles.
Cincinnati, Ohio
February 25, 2011
18
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, 2010.
With respect to the ordinary dividends paid by the Fund for the fiscal year ended December 31,
2010, 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 2010.
Shareholders were mailed a 2010 U.S. Treasury Department Form 1099-DIV in January 2011. This will
reflect the total of all distributions that are taxable for calendar year 2010.
Proxy Voting
The investment adviser is responsible for exercising the voting rights associated with the
securities purchased and held by the Fund. 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 Commissions website at
http://www.sec.gov.
19
Investment objective and policy
The Funds 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 5% and 25% 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 quasigovernmental entities and, as a result, are subject to
the risk that regulatory developments will adversely affect them. With respect to the Funds
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 Funds 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 Board of Directors (the Board) of Diamond Hill Financial Trends Fund (the Fund), at a
regularly scheduled meeting on August 17, 2010, by a unanimous vote, approved the Management
Agreement between the Fund and Diamond Hill Capital Management, Inc. (the Adviser). The directors
considered many factors in
their approval, none of which was considered a sole determining factor, and specifically summarized
the following factors:
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(i)
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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 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.
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(ii)
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The investment performance of the Fund and the Adviser.
In this regard, the Board compared the
performance of the Fund with the performance of various indexes and comparable funds during the
Advisers tenure. The Board compared the Advisors performance to peer groups and noted the Fund
ranked in the first or second performance quartile in the one and three year periods, respectively.
The Board noted that in a difficult market environment the Fund outperformed the S&P 1500 Financial
Index and performed slightly better than the Advisers Financial Long-Short Fund, an open-ended
mutual fund similar to the Fund. Following discussion, the Board concluded that the investment
performance of the Fund was satisfactory and consistent with the Funds objectives and policies.
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20
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(iii)
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The costs of the services to be provided and profits to be realized by the Adviser from the
relationship with the Fund.
In this respect, the Board considered the Advisers 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 Advisers two-year agreement at the outset of
the engagement to waive fees and reimburse the Fund for certain expenses of the Fund 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 Funds net assets. As a result, the
Adviser was required to waive a significant amount of its advisory fee. The Board also noted that
the Funds advisory fees were among the lowest of all financial services fund 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.
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(iv)
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The extent to which economies of scale will be realized as the Fund grows and whether fee
levels reflect those economies of scale.
The Board considered whether economies of scale would be
realized by the Fund at higher asset levels. The Board considered the current economic conditions
and the Funds 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 Fund was to experience
significant asset growth. In the event the Fund 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.
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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
Fund 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 Fund grows and whether fee levels reflect those economies of scale, as discussed
more fully above. The Directors, the majority of whom are 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.
21
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 Funds 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 years 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 Funds 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 Funds Board of Directors adopted amendments to the Funds bylaws
regarding the Chairman of the Board position: The scope of the Chairmans responsibilities and
fiduciary obligations were further defined. Also 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 Funds Board of Directors held February 13, 2006, the Board amended
Article II Section 2 of the Funds 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 entitled to be cast at the meeting.
In November 2007, the Funds Board of Directors adopted several amendments to the Funds bylaws.
First, the Board further clarified the treatment of street name shares held by brokers without
authority to vote them as to a particular proposal. Those shares are treated as shares present and
entitled to vote with respect to the proposal, but will not be counted as a vote in favor of the
proposal. Also, the Board amended the bylaws to provide that a plurality of votes cast at a meeting
of stockholders at which quorum is present shall be sufficient to elect a director.
In February 2011, the Funds Board of Directors adopted an amendment to the Funds bylaws to the
effect the Chairman no longer needed to be a person who is not an interested person of the Fund,
but could not be an affiliate of the Funds investment adviser or administrator.
Dividends and distributions
During the fiscal year ended December 31, 2010, dividends from net investment income totaling $0.09
per share were paid to shareholders. The dates of payments and the amounts per share are as
follows:
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INCOME
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PAYMENT DATE
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DIVIDEND
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September 3, 2010
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$
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0.05
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December 27, 2010
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0.04
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22
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 Funds 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 Funds 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 Funds stock exceeds
the market price per share, the Plan Agent shall make open market purchases of the Funds stock for
each participating shareholders 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 Funds 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.
23
Directors and Officers
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.
Interested Director and Independent Directors
1
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Name, age
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Position(s) held with Fund
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|
Director
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|
Principal occupation(s) and other
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|
of Fund
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|
directorships during past 5 years
|
|
since
2
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Interested Director
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Franklin C. Golden, Born: 1950
Chairman and Director
Managing Director, Wells Fargo Advisors (since 2001) (broker dealer)
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1989
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Independent Directors
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Russell J. Page, Born: 1942
Director
Principal, Rusty Page & Co. (equity markets consulting) (since 1996); Regional Board,
BB&T Corp. (since 2004); Trustee, Appalachian Regional Healthcare Systems (since 2004);
Director, Cannon Memorial Hospital (since 2003);
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|
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2003
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|
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Fred G. Steingraber, Born: 1938
Director
Chairman and Chief Executive Officer, A.T. Kearney, Inc. (management consulting)
(retired 2002); Director, Maytag Corporation; Director, Supervisory Board
of Continental AG; Director 3i PLC; Director, Elkay Manufacturing.
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|
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1989
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Donald R. Tomlin, Born: 1933
Director
Portfolio Manager of Livingston Group Asset Management Company (operating as
Southport Capital Management)
(since 2001);
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1989
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1
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|
The business address for all Directors and Officers is 325 John H McConnell Blvd.,
Columbus, OH, 43215.
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|
2
|
|
Each Director and Officer serves until resignation, retirement age or until his or her
successor is elected.
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24
Principal Officers
1
|
|
|
Name, age
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|
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
President
Chief Financial Officer of Diamond Hill Investment Group, Inc., since December 2001.
|
|
December 1, 2007
|
|
|
|
Gary R. Young, Born: 1969
Treasurer, Secretary, and Chief Compliance Officer
Controller of Diamond Hill Investment Group, Inc., since April 2004.
Chief Compliance Officer of Diamond Hill Capital Management, Inc., since October 2010.
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|
December 1, 2007
|
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|
Brian D. Risinger, Born: 1968
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.
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December 1, 2007
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1
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The business address for all Directors and Officers is 325 John H McConnell Blvd.,
Columbus, OH, 43215.
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2
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Each Director and Officer serves until resignation, retirement age or until his or her
successor is elected.
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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:
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Information we receive from you on applications or other forms (e.g. your name, address, date of
birth, social security number and investment information).
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Information about your transactions and experiences with us and our affiliates (e.g. your account
balance, transaction history and investment selections); and
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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).
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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.
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For more information
The Funds proxy voting policies, procedures and records are available without charge, upon
request:
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By phone
1-614-255-4080
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On the Funds Web site
www.diamond-hill.com/closedendfund.asp
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On the SECs Web site
www.sec.gov
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Directors
Franklin C. Golden
Russell J. Page
Fred G. Steingraber
Donald R. Tomlin
Officers
Franklin C. Golden
Chairman
James Laird
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Investment adviser
Diamond Hill Capital Management, Inc.
325 John H. McConnell Boulevard, Suite 200
Columbus, Ohio 43215
Custodian
JPMorgan Chase Bank, N.A.
14201 North Dallas Parkway
Dallas, TX 75254-2916
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Independent directors
Counsel
Paul, Hastings, Janofsky
& Walker, LLP
600 Peachtree St., N.E.
Twenty Fourth Floor
Atlanta, GA 30308
Stock symbol
Listed Nasdaq Symbol:
DHFT
For shareholder
assistance,
refer to page 20
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President
Gary Young
Treasurer, CCO, Secretary
Brian Risinger
Assistant Treasurer
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Transfer agent and registrar
Mellon Investor Services
Newport Office Center VII
480 Washington Boulevard
Jersey City, NJ 07310
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How to contact us
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Internet
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www.diamond-hill.com
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Mail
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Mellon Investor Center
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Newport Office Center VII
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480 Washington Boulevard
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Jersey City, NJ 07310
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Phone
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Customer service representatives
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1-877-254-8583
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Information Line
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1-614-255-4080
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A listing of month-end portfolio holdings is available on our Web site, www.diamond-hill.com.
Additionally portfolio holdings are available on a quarterly basis 60 days after the fiscal quarter
on our Web site or upon request by calling 1-614-255-4080, or on the SECs Web site, www.sec.gov.
Item 2. Code of Ethics.
As of the end of the period covered by this report, the registrant has adopted a code of ethics
that applies to the registrants principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar functions. The code of
ethics is included as Exhibit 12(a)(1).
During the period covered by the report, with respect to the registrants code of ethics that
applies to its principal executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions; there have been no amendments to,
nor any waivers granted from, a provision that relates to any element of the code of ethics
definition enumerated in paragraph (b) of this Item 2.
Item 3. Audit Committee Financial Expert.
The registrants Board of Directors has determined that the registrant has at least one audit
committee financial expert serving on its audit committee. Mr. Russell J. Page is the registrants
audit committee financial expert and is independent (as each term is defined in Item 3 of Form
N-CSR).
Item 4. Principal Accountant Fees and Services.
(a)
Audit Fees
. Audit fees totaled $18,100 and $17,600 in fiscal 2010 and 2009
respectively, including fees associated with the annual audit and filing of the registrants Form
N-SAR.
(b)
Audit-Related Fees
. There were no audit-related fees in fiscal 2010 and 2009.
(c)
Tax Fees
. Fees for tax compliance services totaled $4,700 and $4,900 in fiscal 2010 and
2009, respectively.
(d)
All Other Fees
. There were no other fees in fiscal 2010 and 2011.
(e)(1)
Audit Committee Pre-Approval Policies
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The Audit Committee pre-approves all non-audit services provided by the independent auditor to the
Fund or to the Funds Investment Adviser and any entity controlling, controlled by, or under common
control with the Investment Adviser that provides ongoing services to the Fund, if the engagement
relates directly to the operations and financial reporting of the Fund.
The Audit Committee is authorized to delegate, to the extent permitted by law, pre-approval
responsibilities to one or more members of the Committee who shall report to the Committee
regarding approved services at the Committees next regularly scheduled meeting. The Committee is
also authorized to adopt policies and procedures which govern the pre-approval of audit,
audit-related, tax and other services provided by the independent accountants to the Fund or to a
service provider, provided however, that any such policies and procedures are detailed as to
particular services, the Committee is informed of each service, and any such policies and
procedures do not include the delegation of the Committees responsibilities under the Securities
Exchange Act of 1934 or applicable rules or listing requirements.
(e)(2) 0.0% in fiscal 2010 and 2009.
(f) Not applicable.
(g) The aggregate non-audit fees for services to the registrant, its investment adviser and any
entity controlling, controlled by, or under common control with the adviser that provides ongoing
services to the registrant were $79,600 and $79,300 in 2010 and 2009, respectively.
(h) The audit committee considered the non-audit services rendered to the registrants investment
adviser and any entity controlling, controlled by, or under common control with the investment
adviser, and believes the services are compatible with the principal accountants independence.
Item 5. Audit Committee of Listed Registrants.
The registrant has a separately-designated standing audit committee comprised of independent
trustees. The members of the audit committee are as follows:
Franklin C. Golden
Russell J. Page
Fred G. Steingraber
Donald R. Tomlin
Item 6. Schedule of Investments.
(a) The Schedule of Investments is included in the Annual Report to Shareholders filed under Item 1
of this Form.
(b) Not applicable.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment
Companies.
See attached Exhibit Proxy Voting Policies and Procedures.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
See attached Exhibit Portfolio Managers Information.
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated
Purchasers.
There were no purchases of shares of the registrants equity securities during the period July 1,
2010 to December 31, 2010.
Item 10. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 11. Controls and Procedures.
(a) Based on an evaluation of the registrants disclosure controls and procedures (as defined in
Rule 30a-3(c) under the Investment Company Act of 1940), as of a date within 90 days of the filing
date of this report, the registrants principal executive officer and principal financial officer
have concluded that the registrants disclosure controls and procedures are effective.
(b) There were no changes in the registrants internal control over financial reporting (as defined
in Rule 30a-3(d) under the Investment Company Act of 1940) that occurred during the second fiscal
quarter of the period covered by this report that have materially affected, or are reasonably
likely to materially affect, the registrants internal control over financial reporting.
Item 12. Exhibits.
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(a)(1)
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Code of Ethics for Senior Financial Officers is filed herewith
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(a)(2)
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Certifications required by Item 12(a) of Form N-CSR are filed herewith.
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(a)(3)
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Not applicable.
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(b)
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Certification required by Item 12(b) of Form N-CSR is furnished herewith
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(c)
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Proxy Voting Policies and Procedures
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(d)
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Portfolio Managers Information
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act
of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
(Registrant) Diamond Hill Financial Trends Fund, Inc.
By (Signature and Title)
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/s/ James F. Laird, Jr.
James F. Laird, Jr.
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President
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Date: February 28, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act
of 1940, this report has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By (Signature and Title)
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/s/ James F. Laird, Jr.
James F. Laird, Jr.
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President
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Date: February 28, 2011
By (Signature and Title)
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/s/ Gary R. Young
Gary R. Young
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Treasurer
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Date: February 28, 2011
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