In the final quarter of 2025, the Diamond Hill Large Cap Concentrated ETF (Fund) experienced a period of underperformance relative to its benchmark, the Russell 1000 Value Index. The Fund's return was 1.30%, while the Index gained 3.81%. This disparity in performance was primarily attributed to the Fund's strategic decision to maintain a limited allocation to companies heavily involved in artificial intelligence (AI), a sector that witnessed significant market enthusiasm during this period. Despite this, the investment philosophy continues to prioritize high-quality, robust businesses with strong cash flow generation and inherent defensive attributes, which are perceived as offering long-term value.
A significant portion of the fourth quarter's underperformance, approximately 70%, stemmed from the portfolio's intentional lack of investment in these high-flying AI-related entities. While the broader market, particularly the technology sector, benefited from the AI surge, the Fund's conservative positioning, focusing on intrinsic value rather than speculative growth, led to a temporary drag on its relative returns. This strategic stance reflects a long-term conviction that market exuberance, especially in nascent technologies, can often lead to unsustainable valuations.
Within the portfolio, certain holdings demonstrated encouraging performance. General Motors, for instance, reported robust results, signaling a stabilization and recovery in the automotive industry. This positive outcome from a core holding reinforces the Fund's approach of investing in established companies capable of navigating dynamic economic environments. The selection of stocks in the healthcare and information technology sectors, however, did not contribute positively to the relative performance during this quarter, indicating specific challenges or market trends impacting these areas.
Throughout the fourth quarter of 2025, there were no alterations in the Fund's composition, meaning no new positions were initiated, nor were any existing holdings divested. This stability underscores a disciplined, long-term investment strategy that avoids frequent trading based on short-term market fluctuations. The focus remains on a concentrated portfolio of companies believed to offer sustainable value and resilience, irrespective of short-term market fads or sector-specific booms.
Looking forward, the investment team remains committed to its core philosophy. Despite the recent market dynamics driven by AI enthusiasm, the emphasis continues to be on identifying and holding businesses characterized by their strong fundamentals, predictable cash flows, and defensive qualities. This disciplined approach aims to deliver consistent, long-term returns for investors, prioritizing stability and intrinsic value over speculative growth.
