Favorite picks from managers of top-ranked fund

Published Fri, Aug 28 20157:00 AM EDTUpdated Fri, Aug 28 20158:55 AM EDT

Even with the sharp drop in the indexes this month, the Diamond Hill Select Fund is up 4.5 percent for the year, beating the market by 8 percent as of Thursday's close. Diamond Hill manages $17 billion in assets, with the Select Fund strategy including mutual fund and separate accounts at $596 million. The Select Fund's performance ranks in the top 1 percent of its mutual fund category this year and the last three years, according to Morningstar. The fund was up 44 percent in 2013 and 12 percent in 2014. In an interview, the fund's portfolio managers, Austin Hawley and Rick Snowdon, discussed their top ideas and how they are beating the market since they took over the fund 2 ½ years ago. Here is what they said… Investment strategy Both portfolio managers emphasized their long-term valued-based perspective and the flexibility of the fund's charter as reasons why it is such a top performer. They look at every potential idea as a proportional interest in a company and estimate the intrinsic value by modeling it out five years. Read More 4 hedge fund managers offer advice on volatile market "We only purchase a stock when there is a significant margin of safety. Where the intrinsic value is much greater than the stock price," said Hawley. "Our fund is differentiated (able to outperform) because it's very concentrated averaging 33 positions in our best ideas. We also have flexibility to invest in smaller companies (as low as $500 million in market cap), which gives us a broader universe." The Select Fund is not constrained by benchmark sector or industry weight limitations according to the prospectus. Top ideas One of their best investments is Valeant Pharmaceuticals , the roll-up specialty pharma company. "Valeant management are great capital allocators. They are incredibly disciplined in buying companies with sticky customers, weak competition and low patent risk," said Snowdon. "The intrinsic value of the company has grown significantly since we owned it, as organic growth was better than we thought." They recently bought a full position in Colfax , a mid-cap industrial name modeled after Danaher. "Colfax is in two businesses: weld fabrication and gas fluid handling. These are highly fragmented industries ripe for acquisitions in adjacent spaces. We are highly confident of the management team's ability to acquire more small industrial companies and drive cost efficiencies," said Hawley. Read More Following huge beat, buy Best Buy? The fund's largest sector allocation is in financials solely due to attractive valuations. Hawley believes many managers have long memories from the financial crisis and are unwilling to wade back into the sector. Even if interest rates do not increase, they see a path to double-digit return on equity. He mentioned Citigroup and American International Group as financial companies trading at attractive valuations.

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Even with the sharp drop in the indexes this month, the Diamond Hill Select Fund is up 4.5 percent for the year, beating the market by 8 percent as of Thursday's close.

Diamond Hill manages $17 billion in assets, with the Select Fund strategy including mutual fund and separate accounts at $596 million.

The Select Fund's performance ranks in the top 1 percent of its mutual fund category this year and the last three years, according to Morningstar.

The fund was up 44 percent in 2013 and 12 percent in 2014.

In an interview, the fund's portfolio managers, Austin Hawley and Rick Snowdon, discussed their top ideas and how they are beating the market since they took over the fund 2 ½ years ago.

Here is what they said…