DIAMOND HILL INVESTM

DHIL
Real-time Estimate Quote. Real-time Estimate  - 10/04 10:20:56 am
170.485USD +3.07%

DIAMOND HILL INVESTMENT GROUP INC : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

07/28/2022 | 04:14pm

Forward-Looking Statements




Throughout this Quarterly Report on Form 10-Q and other publicly available
documents, including the documents incorporated herein by reference, the Company
may make forward-looking statements within the meaning of the U.S. Private
Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of
1933, as amended (the "Securities Act"), and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), relating to such matters
as anticipated operating results, AUM prospects and levels, technological
developments, economic trends (including interest rates and market volatility),
expected transactions and similar matters. The words "believe," "expect,"
"anticipate," "estimate," "may," "will," "likely," "project," "should," "hope,"
"seek," "plan," "intend" and similar expressions identify forward-looking
statements that speak only as of the date thereof. While the Company believes
that the assumptions underlying its forward-looking statements are reasonable,
investors are cautioned that any of the assumptions could prove to be inaccurate
and, accordingly, actual results and experiences could differ materially from
the anticipated results or other expectations expressed in the forward-looking
statements.

Factors that could cause such actual results or experiences to differ from
results discussed in the forward-looking statements include, but are not limited
to: (i) any reduction in the Company's AUM; (ii) withdrawal, renegotiation, or
termination of DHCM's investment advisory agreements; (iii) damage to the
Company's reputation; (iv) failure to comply with investment guidelines or other
contractual requirements; (v) challenges from the competition the Company faces
in its business; (vi) adverse regulatory and legal developments; (vii)
unfavorable changes in tax laws or limitations; (viii) interruptions in or
failure to provide critical technological service by the Company or third
parties; (ix) adverse civil litigation and government investigations or
proceedings; (x) risk of loss on the Company's investments; (xi) lack of
sufficient capital on satisfactory terms; (xii) losses or costs not covered by
insurance; (xiii) impairment of goodwill or intangible assets; (xiv) a decline
in the performance of the Company's products; (xv) changes in interest rates;
(xvi) changes in national and local economic and political conditions; (xvii)
the continuing economic uncertainty in various parts of the world; (xviii) the
after-effects of the COVID-19 pandemic; (xix) political uncertainty caused by,
among other things, political parties, economic nationalist sentiments, tensions
surrounding the current socioeconomic landscape, and other risks identified from
time-to-time in other public documents the Company files with the SEC.


General




The Company derives consolidated revenue and net income from investment advisory
and fund administration services provided by DHCM. DHCM is a registered
investment adviser under the Investment Advisers Act of 1940, as amended. DHCM
sponsors, distributes, and provides investment advisory and related services to
clients through pooled investment vehicles, including the Funds, DHMF,
separately managed accounts, and model delivery programs.

DHCM is committed to generating excellent, long-term investment outcomes and
building enduring client partnerships. By committing to shared investment
principles, including valuation-disciplined active portfolio management,
fundamental bottom-up research, and a long-term business owner mindset, DHCM has
created a suite of investment strategies designed for long-term strategic
allocations from institutionally-oriented investors. DHCM's core values of
curiosity, ownership, trust, and respect create an environment where investment
professionals focus on results and all teammates focus on the overall client
experience. The combination of these investment principles and core values
creates an aligned boutique model ensuring the Company's associates have a
vested interest in the Company's clients' success. This alignment with clients
is emphasized through: (i) personal investment by Company employees in the
strategies managed, (ii) a fee philosophy focused on a fair sharing of the
economics among clients, employees, and shareholders, (iii) a strict adherence
to capacity discipline ensuring the ability to add value for existing clients,
and (iv) compensation driven by the value created for clients.

The Company's primary objective is to fulfill its fiduciary duty to its clients.
The Company believes this focus on generating excellent, long-term investment
outcomes and building enduring client partnerships will enable it to grow its
intrinsic value to achieve a compelling, long-term return for its shareholders.


Assets Under Management




The Company derives revenue primarily from DHCM's investment advisory and
administration fees. Investment advisory and administration fees paid to DHCM
are generally based on the value of the investment portfolios it manages and
fluctuate with changes in the total value of its AUM. The Company, through DHCM,
recognizes revenue when it satisfies its performance obligations under the terms
of a contract with a client.
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The Company's revenues are highly dependent on both the value and composition of
AUM. The following is a summary of the Company's AUM by product and investment
objective, as well as a roll-forward of the change in AUM, for the three- and
six-month periods ended June 30, 2022 and 2021:

Assets Under Management
As of June 30,
(in millions, except percentages) 2022 2021 % Change
Proprietary funds $ 16,494 $ 22,004 (25) %
Sub-advised funds 3,137 3,651 (14) %
Separately managed accounts 6,158 6,705 (8) %
Total AUM $ 25,789 $ 32,360 (20) %


Assets Under Management
by Investment Strategy
As of June 30,
(in millions, except percentages) 2022 2021 % Change
U.S. Equity
Large Cap $ 17,153 $ 19,604 (13) %
Small-Mid Cap 2,624 3,042 (14) %
Mid Cap 904 1,081 (16) %
Small Cap 404 603 (33) %
All Cap Select 417 419 - %
Large Cap Concentrated 82 50 64 %
Micro Cap 13 11 18 %
Total U.S. Equity 21,597 24,810 (13) %

Alternatives
Long-Short 1,894 2,058 (8) %
Total Alternatives 1,894 2,058 (8) %

Global/International Equity
International 49 21 133 %
Global(a) - 17 NM
Total Global/International Equity 49 38 29 %

Fixed Income
Short Duration Securitized Bond 1,497 1,345 11 %
Core Fixed Income 734 710 3 %
Long Duration Treasury 37 50 (26) %
Total Fixed Income 2,268 2,105 8 %

Other
Corporate Credit - 2,266 NM
High Yield - 1,148 NM
Total Other(b) - 3,414 NM

Total-All Strategies 25,808 32,425 (20) %
(Less: Investments in affiliated funds)(c) (19) (65) (71) %
Total AUM $ 25,789 $ 32,360 (20) %


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(a) The Diamond Hill Global Fund was liquidated on December 17, 2021.



(b) The High Yield-Focused Advisory Contracts were sold to Brandywine Global
effective July 30, 2021.




(c) Certain of the Funds own shares of the Diamond Hill Short Duration
Securitized Bond Fund
. The Company reduces the total AUM by the investments held
in this affiliated fund.


Change in Assets
Under Management
For the Three Months Ended
June 30,
(in millions) 2022 2021
AUM at beginning of the period $ 30,322 $ 30,582
Net cash inflows (outflows)
proprietary funds (428) 260
sub-advised funds (157) (99)
separately managed accounts 70 389
(515) 550
Net market appreciation (depreciation) and income (4,018) 1,228
Increase (decrease) during the period (4,533) 1,778
AUM at end of the period $


25,789 $ 32,360




Average AUM during the period $ 28,177 $ 32,095

Change in Assets
Under Management
For the Six Months Ended
June 30,
(in millions) 2022 2021
AUM at beginning of the period $ 31,028 $ 26,411
Net cash inflows (outflows)
proprietary funds (255) 1,987
sub-advised funds (182) (57)
separately managed accounts 158 214
(279) 2,144

Net market appreciation (depreciation) and income (4,960) 3,805
Increase (decrease) during the period (5,239) 5,949
AUM at end of the period $


25,789 $ 32,360




Average AUM during the period $ 29,262 $ 30,146




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Net Cash Inflows (Outflows)
Further Breakdown
For the Three Months Ended June
30,
(in millions) 2022 2021
Net cash inflows (outflows)
Equity $ (576) $ 65
Fixed Income 61 485
$ (515) $ 550

Net Cash Inflows (Outflows)
Further Breakdown
For the Six Months Ended June 30,
(in millions) 2022 2021
Net cash inflows (outflows)
Equity $ (383) $ 1,200
Fixed Income 104 944
$ (279) $ 2,144


AUM decreased $4.5 billion during the three months ended June 30, 2022, due
primarily to depreciation in the financial markets, and net outflows out of the
Company's strategies during the period. The Company experienced equity outflows
during the period which were partially offset by flows into its Core Bond
strategy. Equity outflows were primarily out of the Company's Large Cap
strategy.

AUM decreased $5.2 billion during the six months ended June 30, 2022, due
primarily to depreciation in the financial markets and net outflows out of the
Company's strategies. The Company experienced equity outflows during the period
which were partially offset by flows into its Core Bond strategy. Equity
outflows were primarily out of the Company's Large Cap strategy.


Model Delivery Programs - Assets Under Advisement




DHCM provides strategy-specific model portfolios to sponsors of model delivery
programs. DHCM does not have discretionary investment authority over individual
client accounts in model delivery programs, and therefore, these assets are not
included in the Company's AUM. Rather, the Company refers to these model
delivery assets as assets under advisement ("AUA"). DHCM is paid for its
services by the program sponsor at a pre-determined rate based on the amount of
AUA in the program. Model delivery AUA was $1.8 billion as of June 30, 2022,
$2.1 billion as of December 31, 2021, and $1.8 billion as of June 30, 2021.

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