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Disciplined Approach Pays Off for This 'Smid-Cap' Fund

Gretchen Rupp

Gretchen Rupp: Diamond Hill Small-Mid Cap (DHMAX) receives a Morningstar Analyst Rating of Gold. Manager Chris Welch has led the fund since late 2005 and follows the same disciplined approach used by all of the Diamond Hill strategies. He buys companies that are priced below his estimate of intrinsic value and sells when they reach his targets. This has led to a compact portfolio of about 50 to 70 stocks, and sector weightings can vary meaningfully from peers and benchmark. Turnover has been low, but it can pick up if market opportunities arise.

His process has led to strong long-term results. The fund beats about 90% of its peers during his tenure. Welch also requires what he calls a margin of safety. This is the [discount to fair market value at which the stock is being purchased] and has provided steadier returns in uncertain markets.

For example, during a choppy 2015, the fund's returns beat the category average and its benchmark by about 5% through November. Welch has high conviction in his stock selection, and he will wait patiently for them to reach his estimates, so the fund can lag its category at times. But for those investors who share a similar long-term view, this fund is a solid option.