Diamond Hill Investment Group

Back in May I ran a screen to identify possible 1YPEG stocks. There were five companies that passed the basic test and the subsequent sorting out. One of them was Diamond Hill Investments. DHIL is an Ohio based investment firm. It provides investment advisory services and fund administrative services. It was formed in 1990. The market cap is only $680 million.
DHIL versus Saul’s General Approach and Philosophy.

Growing Fast. Yes. Revenue growing 28%, earnings growing 43%.
Long Way to Grow. Yes. One, DHIL is a small investment firm. Two, they say that they are now sized to be able to manage $20 million to $30 million in assets under management. They currently have $15.9 million AUM, growing at 21% the last 2-1/4 years. So, three to four years of growth ahead without adding staff or facilities.

Recurring Income. Yes, more or less. Over 70% of income is from advisory and administrative contracts with investment funds (the majority of which are DHIL proprietary funds). As long as the assets under management are steady or growing, this income stream repeats. It is not dependent upon new “sales”.

No Debt. Yes, $33.1 million cash, $45.4 million in investment portfolio, $107.7 million total assets. No long term debt. $33.4 million total liabilities of which $20.0 million is accrued incentive compensation.

Insider ownership. Yes. The CEO owns 9.3% of the company directly. Ooops, just saw a newer form 4. He now owns 7.2 %, having sold on November 17, 18 and 19.

Moat. No. I suppose their moat is as wide and deep as last quarter’s fund’s performances.

Reasonable P/E. Yes, currently 19.33 versus revenue and earnings growth of 28% and 43%.

The non-GAAP earnings adjustment that DHIL makes removes the after tax income from its investment income. I assume their cash is invested in their own funds, although I haven’t confirmed that. They feel that removing this income focuses the performance on the business and removes the stock market gyrations. It seems that they do not add back in the stock based compensation which in FY2013 was $7.3 million versus a net income of $22.1 million. This would have a very significant impact on the 1YPEG (lowering it substantially).
One of the dangers of owning this company is the dependence upon the economic macro events and stock market sentiment. A market downturn will hurt DHIL doubly in that AUM will drop as investors flee the market and the market value of AUM will decrease (and the investment income will likely decrease as well).
My purchase of DHIL has been profitable. Purchased at $190.50, DHIL currently at $229.19 (up $6.90 on Monday) so I’ve gained 15% in 6 months. The board declared a $5.00/share special dividend on October 28th. I am tempted to buy more but my first purchase was at a p/e of 17.7, equal to $202 today, so not a better value point a la TMF1000. And, the TTM growth rates are decelerating the last 3 quarters, from 28.4% to 22.5% for revenue ad 53.7% to 43.8% for earnings. Anyway, this is 0.3% of my portfolio and just an attempt to use Saul’s method so maybe I’ll boost it to 0.6% . :slight_smile:


Excellent analysis and post.

Btw - seems like You replaced B with M for AUM value.

A similar stock I have watched and wondered is FNGN. This is a scalable model… but probably not as profitable.
There is another name similar to DHIG, I will find out and post later.

For DHIL - big question for me is - is this scalable with similar level of profitability? I.e. Is it a fund company that sells to RIAs or a agency managing a set of RIAs. Latter is more stable but less scalable.

I have a small position in WETF… Seems to me a quite attractive and scalable model… Probably less strong a moat.

I am intrigued with DHIL - will dig more and update.

Moat. No. I suppose their moat is as wide and deep as last quarter’s fund’s performances.

KC, this reason as of its own is enough to pass…
As Saul is pointed out, his intentions are to hold the company forever. Without such a moat one cannot guarantee prolonged success (like for 10 years).

However, Buffett is holding Goldman Sachs which is an investment banking company. He wouldn’t hold it if it got no moat.
(Perhaps the moat is a strong brand moat, but I am not sure).

If you could figure Goldman Sachs moat (read their 10K), then you can ask yourself does DHIL has the same situation?

By the way the various moats are:
Secrets – Patents etc.
Switch — Hard to switch from Microsoft Office.
Tall Bridge — Rail roads, Pipelines.
Price — At the time DELL vs. other PC makers.

DHIL has continually passed the screens and DD since February. It appears to be much better than TROW and WETF which also often come up. The moat lies in the investing record which, since we know the amazing and amusing statistics about active management, is therefore shallow and requires careful defense. It is susceptible to the world takeover by ETFs. News has been wonderfully infrequent, perfect for accumulators, however it has not gone unnoticed by some hedge funds. Since I could never discern any reason not to buy, I have a tip-top full holding.


When I woke up this morning I wanted to add to my original post. But, as is too often the case, the power was out and my internet connection was down.
What I wanted to add was another of Saul’s criteria, somewhere in the data base, “does something special”. O.k., DHIL is growing. Question: Why? What is special about DHIL that results in its out performance. Versus its peers (S&P Capital IQ), operating margin is 45.4% vs. 24.9%; Net margin is 30.2% vs. 24.6%; return on capital is 49.7% vs. 11.7%; cash flow as % of sales, 40.8% vs. 25.5%. Interesting, but “Why, how?”
The annual report doesn’t shed much light on this. Maybe I can find an investor presentation that will provide some information on their growth strategy. They haven’t invented stock picking “science”. The success is increasing assets under management, so how are they growing that?
After the financial crisis, money poured into bond funds. It seems that this has been reversing which has provided a tailwind to this sector.
BTW, DHIL was up another 3.9% yesterday and then there was an after hours trade down 11.4% from the regular session close!


nice summary - if it matter, dhil is actually a company where you can look at the products.

  • as of oct, 4.7b or so is in the long-short product but that, I believe, is closed due to capacity reasons. So that leaves you with the large cap product. As of yesterday, that one is lower than the SP500 over ytd, ahead on 1 and 3 years and below 5 years. In other words, nothing particularly noteworthy. Yet, unlike most of the entire industry, DHIL has experienced significant inflows, particularly on the proprietary side. Why is somewhat of a mystery - again, even good performance has not resulted in inflows, so clearly they are doing something right in asset gathering.

  • as far as valuation, there are several in the sub 15 range and other than PZN DHIL is being valued more highly than any other asset manager I follow. That’s obviously because of flows, but again - there’s no merit to the flows they are getting. At least, no source.

  • and yes, margins have gone way up due to of all things lower incentive income which if you track inflows doesn’t seem to add up. But operating margins are much higher now.

Does this mean inflows can’t continue positive? Sure.
Does this mean operating margins can’t go higher? Sure.
Does this mean a rising market can’t bring DHIL and other asset managers higher? Sure.

Only thing is, inflows are usually - back in the old days - completely tied in with performance. Given that ‘eh’ performance with DHIl’s underlying products have produced above average inflows, maybe the most important thing to do is ask if these two happy things will continue.
Sure, if they can do 40% EPS growth then paying 19x is ok. But how will that happen?

We get a 40% stock rally
Operating margins go up
Performance attracts sustained inflows
Firm sells itself

Gotta rate those odds…

if it matters, I personally think past earnings growth rates mean almost nothing for many asset managers - the only thing that counts is how they will do going forward, and the only thing that you can look for that and usually, but not always - is performance of the underlying products. That’s what drive inflows. Mostly.

just 2c


Does this mean inflows can’t continue positive? Sure.
Does this mean operating margins can’t go higher? Sure.
Does this mean a rising market can’t bring DHIL and other asset managers higher? Sure.

sorry, this is misleading - I mean:

Does this mean inflows can’t continue positive? They could.
Does this mean operating margins can’t go higher? They could.
Does this mean a rising market can’t bring DHIL and other asset managers higher? Sure, anything is possible.

A red flag is the p/e range over at least the last many years. Every year it has traded in the 10 to 11 range and every year in the 18 to 19 range (this by memory but pretty close) It is now around 19. Not a good entry point historically and I did not add to my position.


Morningstar shows DHLRX and DHSIX as gold 4 stars, DHLSX neutral 5 stars and DHMIX gold 5 stars so they must be doing something right!

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morn rates the funds among the category, not against the indexes. So yes, the long-short fund for example is 5 star rated, but it also underperformed the SP500 by 4.7% annualized over the past 5 years; the LC cap fund has underperformed by 0.8% annualized over 5 years

However, Buffett is holding Goldman Sachs which is an investment banking company. He wouldn’t hold it if it got no moat.
(Perhaps the moat is a strong brand moat, but I am not sure).

If you could figure Goldman Sachs moat (read their 10K), then you can ask yourself does DHIL has the same situation?


Two years ago I figured it out for all to see. The list at the bottom of my post is the most important part. What better moat to have, don’t you agree?




It’s a good point. However, the performance of the S&P over the last 5 years has been more astonishing than credible. It has been a time for indexes. Now, it may be the time for stock selection. I am, of course, moving the goal posts - but then you may have to if the farmer plows up the field.

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Now, it may be the time for stock selection.

true enough - course, it doesn’t quite explain why DHIL has achieved such tremendous inflows despite the numbers, but I think you’ve touched on it - those Morningstar ratings are pretty powerful = esp. for a smaller group where it might make a difference. And to be fair, DHIL’s performance has vs. peers been consistently strong over many periods, and nobody buying the long-short fund (which is closed but could reopen at any time they feel like) ought to be using a straight large cap compare anyway. What’s even more impressive is DHIL used to be a strong oil and gas proponent and they’ve obviously gotten completely away from that, a testament to their stock picking flexibility and acumen.

I’m less enthusiastic on the asset manager itself but then again I’ve been wrong the last 15 points and you can’t help but admire the clockwork in those distributions. But I do wonder why operating margins have been going up with these numbers - you would think incentive comp would be going up, not down, thereby pressuring margins a little but it hasn’t happened.

For what it is worth (very little), I am taking a timeout on DHIL. Sold yesterday based almost completely on the valuation. I will keep it on the radar and invest a bit more time researching their tactics for attracting inflow.
Since I brought DHIL to this board I thought I should disclose my selling.


You surprise me KC. The last time I did a valuation of DHIL (based on price, FCF, ROIC, margins, history, insider-ownership, AUM and RS) I noted in the margin ‘Full House’!

Sorry, this will be short. I’ve just lost three posts to some fat finger key stroke! Now switching to writing it in Word to copy into Fool but my brain is fried.

So, one, the p/e is at 19 and the historical range is 11 to 19. Two, the AUM increase is just 4.9% for the last 12 months and 1.6% for the last 9 months. The price has spiked up recently. The 3rd Q comps are 14% increase for revenue and 3% for eps (2014 and 2015). The 9 months is better, 21% revenue and 30% eps. But I think those good numbers hide the quarterly eps weakness and the flat AUM.

While the p/e has been accelerating, the key metric—AUM—has been decelerating. This is the SKX situation all over again. So I am kind of combining a modified TMF1000 relative valuation approach with a 2nd derivative p/e analysis and my ‘aha’ moment from my SKX chart and I see asymmetric risk. The mantra here is to buy and hold until the thesis is broken. At this point I haven’t developed a thesis (the something special that DHIL is doing). That makes it just a momentum play for me, not a full blown Saul Stock. Even if I had a thesis, the rest of the above leads me to a cold blooded trigger pull—although I am still interested enough to continue to look for the “something special”, but at a casual pace.

Thanks for joining in on this thread. I’m here to learn and share and discuss. Thanks to Saul for starting this board and to all who contribute so much.



Very good and interesting points. My own feeling is that when these investment companies carve out a profitable niche, it can last for years so long as they don’t screw up. This happened with BEN and TROW which both remained on the screen result for years and were very good investments. The thesis lies in the rare combination of ‘growth with figures’ and we differ on whether the current ones are durable; time will tell. Their main risks are ability and ETFs. However, I suspect the (up-to-now well-justified) national and continental index ETF demand phenomenon may be reaching its zenith.

Two, the AUM increase is just 4.9% for the last 12 months and 1.6% for the last 9 months.

my last post here but you could have old info

11-15 AUM was 17.105
02-15 AUM was 16.236
11-14 AUM was 15.306

so 9m +5.4%
12m at +11.7%

DHIL updates AUM monthly

If it matters, the EPS fluctuations (like for Q3) are a function of changes in the investments held in DHIL’s BS which are done mark-to-market so they are up and down when the market does (cause they own their own managed investments which are stocks or the funds that own them generally).

Many investors suggest looking at operating changes only which are dictated by the business vs. changes in the market, though if you are using enterprise valuation computations (which includes the effect of DHIL’s investments) you have to make adjustments. In other words, you have to look beyond simple numbers and see what is going on.

this is the EPS report

Notice the investment loss line
that is causing the distortions

Course, as to my original point, if operating income is going up so much cause they are paying lower incentive compensation, you have to question how long that continues. Usually good performance in the funds, relatively speaking, combined with inflows begets higher incentive comp, now lower. You can see that in the 10Q.

just 2c

Humble apologies to all who have bothered to read this thread. I got my data from the press releases. With an all-to-typical lack of attention to detail I didn’t note that the release gave both GAAP and non-GAAP eps numbers. The eps I used in my spread sheet were GAAP (blush)
As to the assets under management, however, the numbers I used were from the October 28 press release and I have checked the accuracy (and found them slightly wanting). I didn’t use monthly reports as I didn’t know they existed. Last 5 quarters AUM data:
14,474; 15,656; 16,098; 16,734; 15,914. So the year over year was +9.9% (not 4.9%), 1.6% over 9 months, and -5% sequentially.
There is more detail, however. They break out inflows and outflows by proprietary funds, sub-advised, and institutional categories. On a Q3-Q3 basis and 9 month comparisons they have increasing inflows to proprietary, decreasing inflows into sub-advised and increasing outflows from institutional. Overall they have positive inflow for the periods.
It is the market value decrease that changes the picture, a plus 548 for 9 months 2014 and minus 825 for 2015 9 months, for example.

I suppose this is at least enough for Diamond Hill. :slight_smile:


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if it matters

I didn’t note that the release gave both GAAP and non-GAAP eps numbers. The eps I used in my spread sheet were GAAP (blush)

just an opinion, but I would use both - NG to get a feel for what is having above the investment line, but G to get a feel for what is happening after it - after all, if a company is going to hold investments vs. cash on the BS, then there can be a benefit and penalty for doing it, esp. for an asset manager. So I don’t think you made an error by focusing on GAAP. For years I focused on GAAP before flipping to operating income, but I still look at both closely.

Last thing - if I got a dime for every time I overlooked something or someone else noticed something I did not, …so no apologies needed, at least on my end. :slight_smile:

little factoid - I have a friend who was the sole outside attendee when DHIL did its annual meeting - stock was sub $5 I believe.