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| Quarter | Letter Date | Fund Name | QTD | YTD | Tickers | Themes | Quick Take |
|---|---|---|---|---|---|---|---|
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"Leaning into high-quality, economically resilient health care and industrial compounders while trimming consumer cyclical exposure amid rising interest rates and elevated energy prices."
During the third quarter of 2026, the Diamond Hill Small-Mid Cap Strategy declined 4.56% net of fees, outperforming its benchmark, the Russell 2500 Index, which fell 6.37%. Year-to-date, the strategy has delivered a net return of 2.13%. Health care was the primary source of relative outperformance, driven by favorable stock selection and an overweight posture, whereas industrials served as the main relative drag due to adverse stock selection and overweight allocation. Portfolio trading activity moderated following elevated volume in the first half of the year, with new capital deployment tilting toward the lower third of the strategy's market capitalization range. The broader market backdrop deteriorated sharply in September after the Federal Reserve initiated its first interest rate hike in three years, driving Treasury yields higher. Compounding rate pressure, geopolitical conflict with Iran propelled oil and fuel prices upward, heightening concerns for economically sensitive businesses and consumers. While energy and health care generated positive absolute returns, technology and rate-sensitive cyclical sectors retrenched. In response, the strategy continued reducing exposure to consumer-sensitive areas while concentrating holdings in businesses with resilient demand and cash flows. Portfolio activity featured new long positions in offshore drilling contractor Transocean, biopharmaceutical royalty firm AnaptysBio, and industrial supplier United States Lime & Minerals. Conversely, the managers fully eliminated their position in auto parts manufacturer Gates Industrial to fund higher-conviction opportunities. Key positive contributors included Illumina, Revvity, and Waystar, while Regal Rexnord, Knife River, and Red Rock Resorts detracted from performance.
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Algorithmic conviction, macroeconomic posture, and risk appetite signals extracted from this quarterly letter with qualitative explanations.
Market Conviction
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Risk Appetite
Capital Deployment
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