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 GAAP. Distributions in excess of tax basis earnings and profits, if any, are reported in
the Funds financial statements as a return of capital.
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, 2012, aggregated
$19,896,586 and $25,405,334, respectively.
Note 2
Management fees and transactions with affiliates and others Investment Advisory
The Fund has entered into an Investment Advisory Agreement with the 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,
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 Diamond Hill Financial Trends Fund, Inc. (the Fund), including the schedule of
investments, as of December 31, 2012, 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 five
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.
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, 2012, by correspondence with the custodian and brokers. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Diamond Hill Financial Trends Fund, Inc. at
December 31, 2012, 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 five years in the period then ended, in
conformity with U.S. generally accepted accounting principles.
Cincinnati, Ohio
February 28, 2013
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, 2012.
With respect to the ordinary dividends paid by the Fund for the fiscal year ended December 31, 2012,
71.01% 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 2012.
Shareholders were mailed a 2012 U.S. Treasury Department Form 1099-DIV in January 2013. This will reflect the total of all distributions that are taxable for calendar year 2012.
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 toll free 1-614-255-4080 or on the Securities and Exchange Commissions website at http://www.sec.gov.
19
Investment objective and policy
The Funds investment objective is to provide long-term capital appreciation. The Fund will seek to achieve its 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 14, 2012, 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 noted that in a difficult market environment the Fund outperformed the S&P 1500 SuperComposite Financials Index. 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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(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,
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20
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the financial condition of the Adviser and the level of commitment to the Fund by the Adviser and its principals. 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 was 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 by the Adviser under the investment advisory agreements, including long-term performance of the Fund, (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. 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.
21
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 amendments also provide, among other things, that in the event that the date of the
mailing of the notice for an annual meeting is advanced or delayed by more than thirty (30) days from the anniversary date of the mailing of the notice for the preceding years annual meeting, notice by the shareholder to be timely must be
delivered not earlier than the close of business on the 120th day prior to the date of mailing of the notice for such annual meeting and not later than the close of business on the 90th day prior to the date of mailing of the notice for such annual
meeting or the 10th day following the day on which public announcement of the date of mailing of the notice for such meeting is first made by the Fund. 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.
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.
At a quarterly meeting of the Funds Board of
Directors held August 14, 2012, the Board adopted several amendments to the Funds bylaws after a comprehensive review by legal counsel of bylaws that were originally adopted in 1989. The Board approved the amendments to bring the bylaws
up to date and make them consistent with current law and practice and to provide an adequate structure for shareholder meetings now being annually held by the Fund and for shareholder proposals and nominations related thereto. Among other
22
amendments, 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
a majority of all votes entitled to be cast at the meeting. Also, the Board amended the requirements and process for shareholder notices of proposals or nominations to be considered proper, failure to comply with which would cause any such notice to
be disregarded. The Board also adopted several amendments related to the conduct of shareholder meetings and otherwise updated other provisions of the bylaws related to governance, shares and indemnification to make them consistent with current
practice. Please contact the Secretary of the Fund for additional information about the amendments to the bylaws.
Dividends and distributions
During the fiscal year ended December 31, 2012, dividends from net investment income totaling $0.152 per share were paid to
shareholders. The dates of payments and the amounts per share are as follows:
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Payment Date
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Income Dividend
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September 4, 2012
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$
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0.012
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December 28, 2012
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$
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0.140
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Dividends from long-term capital gains totaling $0.607 per share were paid to shareholders. The date of payment was
December 28, 2012.
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 Computershare Shareowner Services LLC (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
23
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, Computershare Shareowner Services LLC 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:
Computershare Shareowner Services LLC
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.
24
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.
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Interested Director and Independent
Directors
1
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Name, age
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Position(s) held with Fund
Principal occupation(s) and other
directorships during past 5 years
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Director
of Fund
since
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2
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Interested Director
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Franklin C. Golden, Born:
1950
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1989
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Chairman and Director
Managing Director,
Wells Fargo Advisors (since 2001) (broker dealer).
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Independent Directors
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Russell J. Page, Born:
1942
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2003
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Director
Principal, Rusty Page &
Co. (equity markets consulting) (since 1996).
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Fred G. Steingraber, Born:
1938
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1989
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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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Donald R. Tomlin, Born:
1933
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1989
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Director
Portfolio Manager of Livingston
Group Asset Management Company (operating as Southport Capital, Inc.) (since 2001).
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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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25
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Principal Officers
1
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Name, age
Position(s) held with Fund
Principal occupation(s) at least the last 5 years
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Officer
of Fund
since
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2
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James F. Laird, Jr., Born:
1957
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December 1, 2007
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President
Chief Financial Officer of
Diamond Hill Investment Group, Inc., since December 2001.
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Gary R. Young, Born: 1969
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December 1, 2007
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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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Brian D. Risinger, Born: 1968
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December 1, 2007
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Assistant Treasurer
Director of Compliance
and Administration of Diamond Hill Investment Group, Inc., since May 2006.
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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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26
NOTICE OF PRIVACY POLICY FOR
DIAMOND HILL FINANCIAL TRENDS FUND
We value you as a shareholder and take your personal privacy seriously. In order to enhance our ability to provide you with the best service possible, Diamond Hill Financial Trends Fund (referred to as
we or us or the Fund) collect, use and share 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.
SAFEGUARDING PRIVACY
Diamond Hill Financial Trends Fund maintains physical, electronic and
procedural safeguards that comply with federal standards to ensure the safety of non-public personal customer information. In addition, we require service providers to the Fund to maintain policies and procedures designed to assure only appropriate
access to, and use of, information about customers and to maintain physical, electronic and procedural safeguards that comply with federal standards to guard 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, such as your name, address, date of birth, social security number and investment
information;
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Information about your transactions and experiences with us, such as your account balance, transaction history and investment selections; and
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Information you supply in written, telephonic or electronic communications with the Fund or service providers to the Fund.
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INFORMATION WE SHARE
We may disclose all non-public personal information we collect, as described above, to companies 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. We also may
disclose non-public personal information as otherwise permitted by law.
QUESTIONS?
Questions regarding this policy may be directed to: 877-254-8583
27
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 advisor 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 toll free
1-614-255-4080 or on the Securities and Exchange Commissions website at http://www.sec.gov.
A listing of month-end portfolio holdings is
available on our website, www.diamond-hill.com. Additionally, the Fund files a complete listing of portfolio holdings as of the end of the first and third quarters of each fiscal year on Form N-Q and each second and fourth quarters of each
fiscal year on Form N-CSR. The complete listing (i) is available on the Commissions website; (ii) may be reviewed and copied at the Commissions Public Reference Room in Washington, DC; and (iii) will be made
available to shareholders upon request by calling 1-888-255-4080. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
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Directors
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Franklin C. Golden
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Russell J. Page
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Fred G. Steingraber
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Donald R. Tomlin
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Officers
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Franklin C. Golden
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Chairman
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James Laird
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President
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Gary Young
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Treasurer, CCO, Secretary
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Brian Risinger
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Assistant Treasurer
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Investment adviser
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Diamond Hill Capital Management, Inc.
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325 John H. McConnell Boulevard, Suite 200
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Columbus, Ohio 43215
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Custodian
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Citibank N.A.
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388 Greenwich Street
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New York, NY 10013
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Transfer agent and registrar
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Computershare Shareowner Services LLC
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480 Washington Boulevard
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Jersey City, NJ 07310
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Independent directors
Counsel
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Paul Hastings LLP
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600 Peachtree St., N.E.
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Twenty Fourth Floor
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Atlanta, GA 30308
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Stock symbol
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Listed Nasdaq Symbol:
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DHFT
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For shareholder
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assistance,
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refer to page 24
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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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Computershare Shareowner Services LLC
480 Washington Boulevard
Jersey City, NJ 07310
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Phone
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Customer service representatives Information Line
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1-877-254-8583
1-614-255-4080
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325 John H. McConnell Blvd.
Suite 200
Columbus, Ohio 43215
614.255.3333
www.diamond-hill.com
Investment Adviser
Diamond
Hill Capital Management, Inc.
For additional information, call:
Computershare Shareowner Services LLC
TOLL FREE 877.254.8583