DHIL - NASDAQ

Welcome to the Diamond Hill Third Quarter 2017 Equity Portfolio Manager Conference Call. My name is Toled and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Kristen Sheffield. You may begin.

Thank you. Good afternoon, everyone and welcome to the Diamond Hill third quarter equity portfolio manager conference call. Thank you for joining us this afternoon. We'll begin today with a few firm updates. Then, I'll hand the call over to research analyst, Bobby Murphy, who will provide some comments about consolidation in the chemical industry and our portfolio holdings in that space. After Bobby's remarks, our equity portfolio managers will provide commentary on their respective funds, which will be followed by an opportunity to ask questions. As a reminder, we will host a separate fixed income portfolio manager call at 2 o'clock PM Eastern time tomorrow. Dial in information is available on the home page website and we hope you will join us. When we are ready for the Q&A session, the operator will provide instructions if you want to ask a question over the phone. You can also type a question on your screen at any time throughout the call. As always, we have a few important compliance statements to go over before we begin. The opinions expressed by portfolio managers are their own and are subject to change at any time as circumstances change. Any discussion of specific portfolio holdings will be as of September 30, 2017. Portfolio holdings are subject to change without notice and a complete list of portfolio holdings as of September 30, 2017 is available on our website. This next slide provides additional important disclosures. We encourage you to read these carefully at a later time. We wanted to take a moment to update you on some personnel additions. Jo Ann Quinif joined Diamond Hill in late August as Managing Director and Head of Institutional Sales. Prior to joining Diamond Hill, Jo Ann was Vice President and Director of Sales and Marketing at Weitz Investment Management in Omaha. She brings 17 years of sales, marketing and client service experience in the investment industry to this new role. We're excited to have her on board as our firm continues to grow. We also added two senior research associates to the investment team. Adam Xiao joined the technology, media and telecommunications team, specifically covering networking equipment and telecom. Chris Piel joined the consumer team, covering retail companies. Adam and Chris are great addition to our deep and talented research team. With that, I will hand the call over to Bobby Murphy. Bobby?

Thanks, Kristen. My name is Bobby Murphy and I'm a research analyst at Diamond Hill. I've been covering the chemical and paper and packaging industries at Diamond Hill for nearly the past five years. The primary responsibility of our research team is to develop business and industry expertise over time. This cumulative knowledge base coupled with our long-term intrinsic value philosophy should enable us to cover - uncover attractive investment opportunities. The focus of this industry perspective is consolidation in the chemicals industry. Over the last few years, a majority of the top 10 chemical firms have been involved in very large global merger or acquisition transactions. Why was this the case? First, for many of these companies, organic volume growth has been stubbornly low since the financial crisis in the 1% to 2% range, we've prevented these companies from achieving earnings growth at rates they had been accustomed to in the past. Second, the 2015-2016 timeframe was especially challenging for chemical companies with industrial indoor agriculture end market exposure, given cyclical headwinds from lower commodity prices and slower overall economic growth. Third, several acquisitions were at least aided in part by the low cost of debt financing available in the capital markets. Thus, these firms saw a greater certainty of earnings growth through combining with other large chemical firms and aiming to achieve significant potential cost synergies as you can see on the table. Later in this presentation, I will address the largest merger in the chemical industry between Dow and DuPont and potential investment opportunities that can result from the merger. Against the backdrop of industry consolidation, we believe that our holdings are well positioned to benefit from this trend. Our first holding, Axalta Coating Systems has already been a direct beneficiary of consolidation in the coatings industry. Earlier this year, Sherwin Williams acquired Valspar and sold Valspar's North American wood coatings business to Axalta at an attractive price. The sale was done in order for the deal to gain anti-trust clearance and we believe Axalta could get engaged in similar transactions should PPG reengage Akzo, Nobel and takeover discussions in 2018 or beyond. Aside from the direct impacts, Axalta should also benefit from more coating industry sales in the hands of PPG and Sherwin Williams who have been rational players from a pricing perspective over time. Finally, although we own Axalta based on a discount to what we believe the business is worth on a standalone basis, we believe Axalta is a unique coatings company that could be an attractive acquisition target. Another Diamond Hill holding, Praxair has signed a definite combination to merge with Linde in a $73 billion transaction that will create the largest industrial gas company in the world. Industrial gas industry is even more consolidated than coatings and similar to coatings, these companies generally enjoy pricing power and above average returns on invested capital. Although expected cost synergies from the merger are fairly low at 2.5% of combined revenues, I believe there could be upside to these estimates, derived from Praxair management running the Linde plants more efficiently than Linde has operated them historically. Products leave the industry in terms of operating efficiency and earn industrial gas operating margins nearly 500 basis points higher than Linde, which highlights the potential opportunity. We believe the combined Linde Praxair business will earn industry leading returns on invested capital with Praxair management in control and we'll be poised to continue to compound earnings growth over the long term. As I referenced earlier, Dow and DuPont recently completed their $130 billion merger on September 1, within 18 to 24 months the company intends to realize 3 billion in cost synergies and split into three separate publically traded companies as illustrated here. We do not currently own shares of the combined entity today. However, we think the combination could create future investment opportunities. DowDuPont CEO Ed Breen, formerly the city of Tyco International will be leading the agriculture and specialty products companies. There are speculation that Breen could similar playbook used at Tyco to further break up the specialty products company into numerous smaller public companies. Occasionally very good investment opportunities can present themselves when there is fore selling by certain shareholders in spinoff situations. Thus we will be following the situation closely. In summary we believe the chemical companies we own in the Diamond Hill Investment portfolios are well positioned in the long run to benefit from any number of scenarios as chemical industry contribution continues. In addition we will be prepared to act if future opportunities present themselves. And I'll turn the call over.

Thanks Bobbie. I will now hand the call over to Tom Schindler, Portfolio Manager Small Cap Funds. Tom?

Thanks Kristen. In the third quarter of 2017 the Diamond Hill Small Cap Fund Class I returned 4.93%, about 75 basis points less than the Russell 2000 Index and 18 basis points behind the Russell 2000 value index. Our performing sectors within the portfolio included industrials, consumer discretionary, and energy. The major underperformers were healthcare and information technology both from an allocation and security selection perspective. Looking at best and worst performers, in the third quarter, Avis was up about 40% and competitor Hertz 94%. This was despite both companies reporting second quarter results that were dismal, Hertz especially more so than Avis. However, each company spoke about pricing turning positive in the month of July and what many investors have taken as a sign of an inflection point for industry pricing. To say that there has been a hyper focus on North American pricing for these companies would be an understatement. Hertz especially appeared to take action to reduce fleet in order to more accurately reflect demand and set the stage for sustainable pricing in industry profits. The Hurricanes have also led to some strength in used car prices that had a minimum short-term results in the industry. Hurricanes were a very topical event in the third quarter, I'll let John Loesch discuss their impacts in greater detail, but the main remaining negative impact in the portfolio is on Puerto Rican bank Popular. Live Nation and Vail Resorts both continue to perform well fundamentally and have seen their stock prices follow. Cimarex continues to show well results above industry peers aided greatly by their Permian and mid-continent positions and has been among our favorites in the E&P sector. Looking at changes in sector allocations, the most noteworthy changes come from relative performance within the portfolio. For instance in industrials, we had one addition Allegiant, but most of the rest of the change from a year ago is as a result of the relative performance of those companies. Other notable sector changes in healthcare, the major decrease in the portfolio position as a result of the acquisitions of both Alere and Universal American. Lastly, the one new position initiated in the third quarter was a Allegiant Travel. This marks a return as we were a shareholder in Allegiant between July 2010 and 2013. During which time the stock returned about 130% and we roughly doubled our money on an average cost basis. Allegiant has been a different type of airline serving mostly leisure travelers from secondary cities on a non-daily basis. A relatively high percentage of flights either originator or terminate in Las Vegas or one of the few Florida cities mostly at Orlando Sanford Airport. We eliminated Alere in late September. The acquisition by Abbott did close on October 3, after a much longer and for a significant period of time very contentious road to closing. After renegotiating the purchase price down from 56 to 51 in April of this year, we believe the outcome was still a good result for Alere shareholders. The post announcement period for the stock in retrospect for a much higher than normal risk for a cash acquisition by a mega cap, but we still did relatively well in Alere for the entire time we owned it. With that I'll turn it back to Kris.

Thank you, Tom. Next Chris Welch will provide comments on the small med and midcap portfolios. Chris?

Thanks Kristen. The small mid-cap strategy returns trail the benchmark the Russell 2500 Index in the third quarter. Primary reasons for that by over 200 basis points; primary reasons were stock selection in the technology and material sectors as well as our cash position that was partially offset by favorable stock selection in the energy sector. If you look at a longer time period five years and since inception, the portfolio is ahead of the benchmark. Moving on to the best and worst performers, I'll just highlight a couple of these, BorgWarner had a strong performance in the quarter. Investors got a little more comfortable with their positioning and their products in the growing electric vehicle field. And then NPR, homebuilder we saw continued home price appreciation and they were able to improve their gross margins. On the negative side, LifePoint Health, there was kind of - a lot of ups and downs, a lot of discussion of volatility with respect to discussions about healthcare reform. The actual changes in healthcare regulations were primarily related to the exchange business, which is a small part of what impacted LifePoint relative to healthcare reform. The impact to them was more on the Medicaid expansion side of things. So there hasn't really been a lot of change there. Though LifePoint also, their hospitals are primarily in rural areas. And rural areas have had a tougher economic go of things than some more urban areas. So that's been a bigger factor in some of the headwinds for them. And then finally three of the stocks on the worst performer list had some impact in the short term from the hurricanes, Newell Brands, Axalta as well as XL Group all had some impact from Hurricane through either rising raw material prices or for exile losses on the insurance side. But those are all short term impacts. Looking at the sector allocation, financials is still the largest sector weight in the portfolio. We have a decent size weight and regional banks. I want to emphasize that that bank exposure is primarily based on unique characteristics of the individual company rather than based on any forecast of rising interest rates or any forecast of regulatory or tax reform. If you look at banks like First Republic which is a high net worth bank with an extremely high credit profile as well as very rapid growth. If you look at Silicon Valley Bank shares SVB Financial which has a unique position with venture capital firms and technology businesses. DFK Financial an outstanding lender in the energy field. It's really more of the unique characteristics of these banks are why we own them. And then on the cash side of things, cash is between 9% and 10%. It's been hard to find attractive new ideas for the portfolio. Looking at profiles statistics, you see 19% turnover that's a little bit below our long term average of somewhere in the 20% to 30% range. Just thinking about turnover, I mentioned it's been hard to find new ideas. We've invested in five new securities for the first nine months this year that's compared to a typical year where we'll buy maybe ten to fifteen new securities. So we're well behind the average case in a normal year. On the flip side of things, we've sold six securities out of the portfolio. Of those securities four of them have been acquisitions that have closed. So only two securities were sold just based on us actively eliminating the position. Looking at the new and eliminated positions, Tom mentioned Allegiant, American Campus Communities is a student housing REIT that we bought during the quarter. Brighthouse Financial is an annuity and life insurance provider that spun out of MetLife and we thought the valuation looked attractive. And then on the eliminated position side, Dover, a recovery in their energy business, was the primary driver that gave us an opportunity to sell at an attractive price. And then Staples, the acquisition of that business by private equity closed. And then moving on to the mid-cap portfolio trailed the benchmark, the Russell Mid Cap Index on the quarterly and year to date basis. Similar factors to this mid portfolio so I won't go through those again. For longer periods of time modestly ahead of the benchmark for the prior three years and modestly trailing the benchmark since inception which is just under four years. Nothing that I'll add on the best and worst performers, similar cash position to the SME portfolio, about 9.5%, we've had four new positions that we've bought for the mid-cap portfolio this year. So again, very difficult to find attractive new positions and that turnover rate has been 13% over the past 12 months. The one different position on the eliminated side is Eastman Chemical. That stock had some recovery from some poorly timed commodity hedges that negatively impacted their earnings over the past year or two. And so, we sold on the rally. That was a relatively small position we sold that on the rally and the stock. So with that, I will turn it back to Kristen.

Thanks, Chris. Next, Chuck Bath will discuss results for the large-cap fund. Chuck?

Thank you, Kristen. The performance of the large-cap fund is shown on the exhibit, the shorter term performance numbers are about in line with the market, a market that's been very strong, but very happy with the long term numbers, not just in terms of the absolute returns, but the relative returns as well. In terms of the best performers in the portfolio, Tom talked about Alere. We owned Abbott Labs who was the acquirer of Alere. Now that Alere acquisition has been hanging over Abbott for quite some time, having that deal finalized and the issues behind us caused Abbott to perform better and that combined with our other acquisitions, St Jude, which had some early hiccup is now performing better. I think that's helped drive Abbott's - group Abbott's performance. Citigroup is really indicative of the strong performance in the entire financial services sector. Citi is our largest holding in that group and therefore representative of the strong performance of financials. In terms of BorgWarner, auto has just become very much out of favor, auto and auto related become very much out of favor in the first half of the year, so the stock was very expensive in this. As auto sales have held up and maybe even picked up a little bit, while BorgWarner stock has recovered as well. And I think it - most of the performance reflects the fact that stock is being too cheap early in the year. In terms of the worst performers, some of the consumer staples companies whose valuations may be a bit stretched, just as the auto stocks become a bit, we're a bit cheaper in the year, Kimberly-Clark and Philip Morris. I think the performance of those names is more indicative of the fact they started at a relatively high valuation, because fundamentally, the companies have done fine, not fantastic, but okay. And then, the United Technologies sold off because of the acquisition that looks to me, strengthen their position in aerospace, I guess my main concern is whether regulatory oversight will allow the deal to take place and if it doesn't, they look pretty full of uncertainty hanging around the stock for a while, not unlike what with Abbott Labs would be with Alere acquisition hanging over the portfolio for a while. So while it's a bit controversial, I'm favorably towards the Rockwell acquisition, especially as a price which we discussed. As you will see in the portfolio weightings in the large-cap financials, like they did for a considerable period of time, represent the largest weighting in the portfolio. [indiscernible] reaching all-time highs. Many of the hardest holdings in the portfolio like Citigroup, Morgan Stanley, B&C are all financials and we find that that area of the market to be very attractive in the market, in a market environment, which is not - cannot be labeled cheap. And then consumer discretionary, again, that is a fairly heterogeneous group of companies, which runs the gamut from Whirlpool to Ford to Disney. So not really exactly a typical group where the companies are somewhat related. There's little sort of - little common theme in those holdings. It's just where we're finding pockets of value in the consumer discretionary sector. And then, you'll see the energy continue to be a very small portion of the portfolio and like it has been for a few years now, cash is very low, just under 2% and I'm comfortable with that. Remember the call, at the end of last quarterly call, I am not a member with the market valuation as I have been for quite some time. Market valuation seem to be okay at best, not cheap. And so while I'm quite comfortable with low cash, because they continue to find new ideas to buy, I'm not making those concerted effort as it was in the past to keep cash exceedingly low, because the outsized opportunities in the equity market seem to be more behind us, as we've had a market that's a double digit return in the market year-to-date in the large cap broader indexes. Finally, in terms of some of the statistics, the portfolio turnover, 21%, that's pretty normal. It hovers around 20% and has for a considerable period of time. So I don't really think that was at all surprising and new names, Brighthouse Financial has been discussed, it was spun out of MetLife. Originally, like many of the spinoffs, when they first announced like anticipated selling that security, but when the price at which the stock was trading was so attractive, I decided rather to sell it to raise our weighting in the portfolio. So we purchased additional shares at Brighthouse subsequent to the spin off. And then in terms of eliminations, Capital One, we've fully eliminated, mostly to reinvestments, proceeds and more attractive credit card company, Discover Financial Services. Cisco has struggled due to high levels of competition and challenged market shares. And then finally, Stryker was a name we sold simply because the stock had done very well and restored it with some intrinsic value. That covers the point that I wanted to make for the portfolio for this quarter. So, let me turn it back to Kristen.

Thanks, Chuck. Next, Rick Snowdon will give us an update on the All Cap Select fund. Rick?

Okay. Thanks, Kristen. For the third quarter of 2017, the All Cap Select Fund returned roughly 4.5%, which was in line with our benchmark, the Russell 3000. Relative to the benchmark, the best sectors for us were consumer discretionary and healthcare, both of those were due to positive stock selection. This was offset a bit by poor performance in energy, where we were underweight and in fact did well and materials were our single holding, had a tough quarter. On the next slide, you can see some the best and worst performers. A lot of them have been discussed already. So I'll just mention one on each side of the ledger. NVR, which is a very efficient home builder with a great balance sheet and great history of capital allocation, they continue to show strength and order growth and gross margins. So t hat's likely why they did well and on the negative side was United Continental, they offered weaker guidance sort of owing to three different things, hurricanes, really Harvey In particular, there are - some friction around the introduction of their basic economy class and then fair battles, I mean, it's pricing battles with ultra-low cost carriers like spirit in front here. The hurricane is obviously transitory. Basic economy, we think, should work itself out and if it doesn't, they can always ditch that effort. So either way, things get better. The ultra-low cost carrier fare battle I think is a bit more concerning. Although as United gets into sort of battle with those guys, it's a much bigger impact on the ultra-low cost carriers than it is on United, because it affects every seat on the low cost carriers, whereas it only affects a portion of the seats, a minority of the seats on the United flight. So we feel relatively comfortable that that will work out. Finally, there's still a lot of low hanging fruit on both the cost and revenue sides for United and we think that represents a very positive tailwind. The next page, in terms of the sector weights, you can see that year-over-year, there's a few changes. Bear in mind, these are all just residual impacts from bottom up, name by name, stock selection, but to summarize that, essentially I think, it looks like we added a consumer, both discretionary and staples at the expense of industrials and healthcare. The industrial decline - excuse me, it was more a matter of harvesting profits in a sector that had performed well, while going from cheap to fairly valued and healthcare, the healthcare decline was a sector that had some negative developments. We're reducing our exposure in that sector. Finally, on the next page, you can see our new and eliminated names. Johnson Controls is a name that we'd watched for a while. We like the business and the Tyco acquisition, but we're concerned about the CEO. His departure was just accelerated and we like the track record of his replacement, so we felt comfortable initiating a position there. Chuck mentioned Brighthouse, very similar story there. We got it in the spin and expected to sell it, but it got so cheap that we actually added to it. We exited Cimarex after several years. We like the assets and think they've done a great job, improving well economics and allocating capital, however we're concerned that this same success along with that of the other US shale players will limit the upside in the commodity. And then finally, Cincinnati Bell is a name that we had only added in to the fund in the second quarter. The stock appreciated before we can make it a full position and in the meantime, they announced a couple of acquisitions, which we felt were inconsistent with the strategy that had been the reason we became investors in Cincinnati Bell to start with, so we exited that position. And that's about it. I'll pass it back to you Kristen.

Thanks Rick. Next Chris Bingaman, Portfolio Manager for the Long-Short Fund will provide an update on recent results. Chris?

Thanks Kristen. In the third quarter the long-short fund was down about 0.5% versus 278 basis points for our blended 60/40 benchmark. The under-performance was primarily driven on the short side. On the long side it was underweight allocation in tech and selection and industrials. On the short side primarily selection and tech industrials and consumer discretionary. In terms of best and worst, on the top performers, best performs a lot of these have been mentioned many of them are weighty positions that have been in the portfolio for a number of years. The worst performers I think Jason is talking about Boeing and Stamps a bit next when he addresses research opportunities. I think John Loesch is going to discuss Popular a bit which has been mentioned. Arista Networks, a tech company that we've been short for a period of time is definitely surprised us in terms of the strength of their underlying fundamentals. We've reduced the position because of that. But we still maintain the positions, the stock trades are very, very lofty valuation. Again fundamentals have been very good surprises on the upside, but it is a hardware business very developed sophisticated both competitors and customers and I feel fairly confident that there will be a competitive response combined with the current valuation still provides an opportunity on the short side again. We have reduced it though because the thesis is much more evaluation based than fundamental based at this point. Moving along to sector allocations, not a lot of changed. Similar to last quarter a bit of a reduction in financials and healthcare, some of the weightier positions are a bit less compelling after a fairly strong year of appreciation. And on the short side, again we've mentioned this in the last couple of quarters reducing some of the exposure in Staples as those have been sharp underperformers and many of them have been trimmed or eliminated from the portfolio. Moving along to statistics, nothing real notable there, a bit less exposure on both the long and short side I will address that in a second. New and eliminated a lot of the new positions have been touched on. One that hasn't is Starbucks obviously a very, very large organization, great brand, the stock has been flattish for a couple of years, a bit of concern over the growth outlook going forward. We don't find it to be terribly compelling and that's why it's a fairly modest sort of waiting right now. So we're monitoring it, if we get an opportunity to add to it at slightly better valuations we will look to do that. Coke and Creek have both been in the portfolio in the past. Covered successfully took the opportunity this last quarter as they've rallied to reinitiate positions. On the eliminated side nothing real noteworthy, generally speaking those positions worked well. Ubiquiti is one that was a poor short and the cost to borrow has become very, very high, very costly to borrow the shares so we covered that position during the quarter. And finally I just mentioned exposures, down a bit mostly on the short side, but overall gross down to about 108 and net because the reduction came on the short side the net ticked up just a bit to 55%. And that's all I had, I'll turn it back to Kristen.

Thank you. Now Jason Downey will review the Research Opportunities Fund. Jason?

Thank you, Kristen. The Diamond Hill Research Opportunities Fund Class I shares declined 1.2% during the quarter trailing the 4.6% again for the Russell 3000 Index and a 3.5% gain for our secondary blended benchmark. This brings our trailing five-year return to 10.1% versus 14.2% for the Russell 3000 and 10.7% for the blended benchmark. The short side of the portfolio is the primary driver of the underperformance during the quarter. The largest attractors were short positions in the industrial and information technology sectors led by short positions at Boeing, Stamps.com and Arista. Chris has already discussed Arista, so I'll touch on Boeing and Stamps. During the quarter, Boeing reported strong earnings and issued guidance that implies cost saving measures in the supply chain are offsetting revenue and mix headwinds. Margins have remained resilient despite year-over-year revenue decline of close to 8% year to date. Boeing's most recent guidance implies further margin expansion in the aerospace unit despite mixed headwinds as they begin to reduce production of their high margin 777 aircraft. Further the company is articulating plans to aggressively grow their exposure to the higher margin aftermarket during the next several years. They've indicated they are targeting an incremental 35 billion in revenue. While they will face obstacles in achieving this goal and companies within the supply chain are taking action to be in a better competitive position to combat these efforts, it's a large potential opportunity and an additional risk to the thesis. As a result of these factors, we have lower conviction in our short thesis as it rests now more on evaluation than declining fundamentals and we trimmed the position size accordingly. Stamps.com [indiscernible] strong quarter and after they posted a blog in which the Chief Marketing Officer of the US Postal Service seemed to endorse the company's business relationship with agents are able to resell postage. These agents are able to purchase the postage at a discount from the Postal Service and presumably are supposed to use part of this discount to incentivize incremental Postal Service volumes. However, Stamps is routing some of their existing postal service volume through these resellers with much of the discount split between Stamps and the agents. So the Postal Service ends up with lower pricing and little incremental volume. We've been skeptical of this element of Stamps business model and we were surprised by the interview. While there are still indications US Postal Service may be considering changes to the program, we've reduced the position size to account for an increased probability that there are no material changes to the program. The largest positive contributors to performance during the quarter were three of our largest long positions Vail Resorts, [Indiscernible] and Cognizant Technology. Slide 39 shows our year-over-year changes in sector exposure. You can see the largest increase year-over-year is long exposure and the industrial sector and short exposure and the information technology sector. While the largest reduction than exposure is long exposure and the information technology sector. Turning to Slide 40, you see there were several new positions in eliminations during the quarter. I'll just briefly highlight a few new positions that are unique to the Research Opportunities Fund. On the long side, we initiated positions in Credit Suisse and WESCO International. With Credit Suisse fundamentals are improving as the company is executing on its restructuring plans, they've improved the balance sheet and are right sizing the investment banking and trading business which has obscured the more stable pieces of the business in recent years and they're shifting focus to the company's global private wealth franchise. We think these fundamental improvements will eventually be rewarded with a higher multiple WESCO is a distributor of electrical, industrial and communications materials. Distributors are being painted with a broad brush with regards to their exposure to e-commerce competition. WESCO is a distributor that is more insulated from this competition due to technical sophistication and customization of many of its products. We also think the company is well positioned to capitalize on eventual consolidation in its fragmented market. On the short side, we initiated positions in HealthSouth and Universal Electronics as we expect margins to come under pressure for both companies over the next few years. HealthSouth is a healthcare services provider that should face margin pressure as inpatient rehabilitation hospitals encountered Medicare reimbursement pressure. The company will also face headwinds from its mix of business as they grow their lower margin home health business. Universal Electronics makes remote controls and we think margins will continue to be pressured due to the competitive position as they depend on large cable TV providers for grow. Wrapping up, portfolio concentration remains high with our Top Ten holdings representing about 44% of net assets which is a bit higher average of 40% since the middle 2014. Our net exposure increased about 450 basis points to 79.5% during the quarter, a bit higher than our long term average. This is due to an increase in our long exposure, our short exposure was roughly flat throughout the quarter. Our gross exposure increased to 126% which is roughly in line with our average over the last few years. With that I'll turn it back to you Kristen.

Thanks Jason. And finally John Loesch will discuss the financial long-short fund. John?

Thanks Kristen. The financial long-short fund returned 2.97% in the third quarter, trailing the 3.96% return of our blended benchmark, modestly lower net exposure, the impact of hurricanes and several holdings, and new positive movement in the short book were the primary drivers of underperformance in the quarter. Over the five year the fund is modestly ahead of our blended benchmark. Looking closer at the performance of some individual holdings, Chuck discussed Citigroup earlier, so I'll highlight Atlas. Atlas Financial shares continue to appreciate after the company reported strong second quarter results with solid topline growth and margin performance. Additionally, the company reported stable results in their Michigan business for the second quarter in a row after reporting a large loss in Q4 2016. Another attractor as Tom Schindler mentioned, the hurricane impact on the portfolios both Popular and Validus were impacted by the hurricanes. Validus which is a reinsurer, sold out meaningfully in late August and early September on the back to back to back hits of hurricanes Harvey, Irma and Maria. Validus shares were down about 20% for the quarter through the first week of September, when it looked like Irma was going to hit Miami directly, which would have been an enormous insurance and humanitarian event. Due to the uncertainty at the time and increased negative tail risk of these events, we decided to not meaningfully increase our insurance holdings during this period, despite the sell-off. The shares have now recovered nearly all of that decline and the company recently reported estimated losses below market expectations. Going forward, we believe these events should have a modestly positive impact on insurance pricing. After narrowly escaping a direct hit from Irma, Hurricane Maria battered Puerto Rico, causing extensive damage and impacting the shares of Popular, the largest bank in the island. While there is increased near term uncertainty, Popular has a large excess capital position, has meaningfully de-risked the balance sheet since the financial crisis and should benefit as aid money flowed to the island to help with the rebuilding effort. The company we know well, have been invested in for years and the shares now trade at a large discount to tangible book value. Moving on to industry exploders, over the last year, we reduced the long bank exposure at shares rallied following election and optimism for reduced regulation, lower tax rates, economic growth and higher interest rates. Progress on regulation, taxes and accelerating economic growth have proven more elusive than the market initially expected. And then lastly, as I mentioned last quarter, we've been selectively adding the higher quality REITs and shares of solar following the move in interest rates. Moving on to portfolio statistics, Chris Welch mentioned American campus communities under the new positions and Brighthouse has also been mentioned. EastGroup Properties on the short side is an industrial property REIT primarily located in the US markets with high rental prices and full occupancy rates, we believe they will have a difficult time sustaining the strong growth, reflecting the elevated stock price. And then we covered our position in government properties as it reached our intrinsic value. Lastly on historical exposures, I mention trimming exposures through the rally, you can see that in the graph and that is all I have for the financial outlook.

Thanks, John. That concludes our prepared remarks. We're now ready to begin the question-and-answer segment of today's call.

[Operator Instructions]

While we wait for questions on the phone, we did get a question from the webcast and this is for Bobby. Bobby, do you believe that consolidation is likely to continue in the coatings industry?

Yes. Thanks for the question. The short answer is yes. I expect consolidation to continue. The coating industry remains very fragmented. For a perspective, the top four coatings firms control less than 50% of the global coatings market versus closer to 75% in industrial gases. The remainder of the coating industry are not controlled by these players, consist of greater than 5000 firms. So there's a long runway of consolidation left in many coatings industries and especially in industrial coatings which is an area the business Axalta has been growing rapidly. And as I mentioned earlier, PPG could decide to reengage Akzo Nobel and take care of discussions or Axalta itself could become an acquisition target at some point. Also, all of the CEOs of these companies have been fairly vocal on their expectations for industry consolidation to continue over the next several years. So as I said, there is a very high probability that this trend will continue.

Thanks, Bobby. Paula, do we have any questions on the phone?

We're showing no audio questions.

Okay. We have no questions on the webcast and no questions on the phone. So we'll go ahead and wrap up. As a reminder, for those of you who missed parts of the call or would like to listen to it again, we will post a replay on our website in a few days. Once again, thank you for joining us today and for your continued support of Diamond Hill. We look forward to speaking with you next quarter.