Diamond Hill Investment : 2022 (Dated March 23, 2023)

DIAMOND HILL INVESTMENT GROUP, INC.

ANNUAL LETTER TO SHAREHOLDERS

March 23, 2023

Dear Fellow Shareholders:

2022 was a tough year for equity investors and arguably an even worse one for fixed income. The year began with a market shock from Russia's invasion of Ukraine in late February, which sent energy prices skyrocketing and further complicated supply-chain issues that were a hangover from the pandemic. Subsequently, both asset classes were hit hard by the rapid increase in interest rates by the US Federal Reserve and other global central banks as policymakers attempted to rein in inflationary trends.

Rising interest rates tend to warrant lower valuations for equities, particularly those with high growth rates, and we saw that play out in 2022 as P/E multiples for global stocks declined. Growth stocks severely underperformed value stocks due in large part to the strength of the energy sector, which has historically carried a heavier weight in value indexes than in growth. Broadly speaking, the energy sector advanced more than 60% in an otherwise down market, so investors with no or low exposure missed out on some of the only gains the market offered last year.

In US fixed income markets, 2022 marked the worst annual performance for the US Bloomberg Aggregate Bond Index since its inception in the early 1970s. The environment was highly unusual given the velocity and magnitude of rate increases by the Federal Reserve, which led to one of the largest corrections in the fixed income markets that we've ever seen. A fair amount of uncertainty remains in terms of the future path for interest rates. However, fixed income should be well positioned to return to its place within an overall asset allocation as the ballast providing an offset to overall equity market volatility. This isn't to say that 2023 is going to be all positive, simply that the environment could be improving for bottom-up investors who are willing to do the fundamental work to identify attractive risk/reward opportunities.

While 2022 was not for the faint of heart, the correction in capital markets should not have surprised long-term market observers. In fact, US equity markets have posted double-digit gains in 10 of the last 14 calendar years (since 2009, following the global financial crisis) - a feat most long-term investors knew wasn't sustainable. The disappointing returns broadened the opportunity set among global equities for valuation-disciplined,long-term investors. In fact, attractive opportunities are being overlooked by some investors because they are preoccupied with how these companies will fare in a recession rather than recognizing their ability to thrive over the long run.

Our dedication to a five-year investment time horizon allows us to see beyond short-term volatility

• both economic and market - and helps position our clients to capitalize on dislocations like those introduced by 2022.

In an unprecedented year featuring double-digit negative returns for both equity and fixed income markets, we remained committed to generating long-term investment results and providing

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superior service for our clients. As always, we aim to deliver exceptional results for clients over a full market cycle. We believe we are one of few in our industry with a truly long-term focus - in our client partnerships, in our investment approach, and in the way we manage our business.

Industry Dynamics Create Challenges and Opportunities

2022 was a stark reminder that the market has a tremendous impact on asset managers' returns year-over-year. Across most of the traditional asset classes, poor performing markets tend to amplify the behavioral weakness in investing - the fear-induced flight to what are perceived to be safer assets - causing significant outflows for the asset management industry. Ultimately, asset managers are judged on performance and growth. And while the market drives performance results over the short term, creating value for clients over the long run is the most critical input to long-term organic growth.

Revenues in the industry (traditional asset management) have gone from $80 billion in 2004 to $200 billion in 2021. The vast majority (roughly 90%) of that growth has come from market appreciation. Companies can try to gather assets or change their product mix, yet most of those efforts have had little relative impact on outcomes over the past decade or so, given the strong market environment over that period. The remainder of that asset growth (roughly $50 billion in inflows) was largely offset by changes in product mix, including the shift to passive, the introduction of lower fee products and by fee reductions.

We think this lays a backdrop of opportunity for an actively focused boutique like ours. Within the passive space, roughly 75% of flows over the past 5-10 years are concentrated in the top 10 firms. In active management, however, only about 25% to 30% of inflows are concentrated with the top 10 firms. Additionally, more than half of US assets (approximately 57%) remain invested with active managers despite the shift to passive over the past decade. Both factors provide ample opportunity for boutique firms to succeed.

Another interesting evolution in the industry is that advisor-directed assets have been rising and are expected to continue growing; we are seeing growth in model portfolios and fractional share platforms. Global assets in model portfolios have reached approximately $4.9 trillion, with 18% annual growth over the last five years. We believe our nimble, client-centric approach to delivering our strategies in a variety of vehicles will position us well in the coming years. Given these developments, asset managers will need to adapt and be prepared to deliver the intellectual capital required for these solutions, which are likely to have a substantial impact on the industry over the next decade.

Diamond Hill's Vision for Long-Term Success

Our commitment to developing enduring client partnerships is demonstrated by the care we take in aligning our interests with our clients through capacity discipline, by investing alongside them, and by keeping fees reasonable so clients hold on to more of their returns. To ensure we have a disciplined platform that allows us to deliver for clients, our investment team aligns on our foundational, shared principles.

• Active, fundamental approach. An active, research-driven approach that capitalizes on our intellectual curiosity and unique insights is essential to deliver better returns than benchmarks or peers.
• Ownership. Investing with an ownership mentality requires deep due diligence to build the conviction needed to invest over the long term.

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• Long term. Focusing on the long term allows us to look beyond near-term noise, allowing clients to realize the benefits of our deep, disciplined research process.
• Valuation discipline. We believe the best way to compound returns is to take an ownership stake in an investment at a discount to its underlying value and have the discipline to wait for that value to be realized.
• Strategic capacity management. Prudent capacity management protects our ability to generate competitive long-term investment results for our clients.

We believe our long-term approach positions us well to be successful regardless of market or industry dynamics. And we remain committed to investment excellence.

While the market influences outcomes in the short run, the performance of our investment strategies and thoughtful organic growth drives the value of our firm over the long run. Our ability to deliver excellent investment results for our clients and our ability to retain and prudently grow our client base continue to be our priority.

Progress on Our Strategic Initiatives

Overall, our long-term strategic goals include enhancing our ability to outperform for clients, further diversifying our business so we can continue to weather any market environment, and thoughtfully growing the business - to bolster our firm's long-term viability for the benefit of each of our stakeholders. We believe an innovative mindset concentrated on growing strategies to capacity and developing new capabilities will enable us to drive future growth.

In 2021, we discussed the long-term goals that drive our strategic initiatives, which are intended to create lasting value for our key stakeholder groups - clients, associates and shareholders.

We want to deliver excellent investment outcomes that result in partnerships where our clients fundamentally believe in what we do and how we invest. We continue to make strategic decisions to support the long-term success of our investment team as it is the driver of successful investment outcomes. To that end, in 2022, we welcomed Win Murray to the firm as Director of Research. Win is responsible for leading our equity research team, identifying outstanding investment talent and providing opportunities for professional development. We also continue to consider the ways in which we deliver our investment strategies to ensure clients can access our offerings. Over the years, we have increased our CIT offerings, which are a vehicle in the defined contribution space - we now have CIT vehicles for five of our US equity strategies and one of our fixed income strategies. We will continue to be thoughtful about vehicle development in our aim to meet the needs of our clients, including delivery platforms where we have the opportunity to use our intellectual capital to serve a broader base of clients.

Given the significance of ESG within our industry, our near-term goal was to articulate how and where ESG considerations factor into our investment decisions. Through the diligence of our portfolio managers and analysts, we have completed ESG risks and opportunities assessments for each security in our equity strategies and have set forth a process to sustain this effort into the future. This is in addition to our investment sustainability policy, published in 2021, which details how sustainability considerations, including ESG risks and opportunities, are embedded in our fundamental process. More recently, we published a corporate sustainability policy that discusses the benefits of our long-term perspective for our clients, shareholders, associates and community.

For our associates, we aim to cultivate a workplace where we can thrive doing our best work in a culture that enables success. A significant part of this is fostering a diverse, equitable and

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inclusive (DEI) culture that empowers, supports and develops intellectually curious professionals. We know DEI is a journey, and we recognize that transparency and accountability are critical to driving real change, as such we've pledged to report our progress annually. We provided details of our recent achievements in our first DEI Annual Report, which can be found on our website.

As we think about the long-term nature of our business, we recognize areas where we have made significant headway on our strategic objectives - turning what were once initiatives into ingrained business practices. As discussed, we have made material advances on our ESG- and DEI-related goals, and we are confident we can prioritize additional strategic objectives that will support our long-term success. One such objective is operational excellence - ensuring our operating model supports the evolving needs of our key stakeholders. This includes further enhancing our ability to support custom client mandates, automation and process improvement for scalability, as well as data governance.

Effective March 31, 2023, I am pleased to announce that Jo Ann Quinif has been promoted to president of Diamond Hill Capital Management, and I will remain CEO and president of Diamond Hill Investment Group. Jo Ann has played a meaningful role in delivering for our clients and strengthening our business operations since joining the firm in 2017 and will also continue as our chief client officer. Her ongoing leadership will further enable us to effectively execute and deliver on our strategy.

Financial Results

The challenging market and industry dynamics previously discussed had a negative impact on our assets under management ("AUM") and assets under advisement ("AUA"). Our combined AUM and AUA declined from $33.1 billion at the beginning of the year to $26.6 billion at year-end. That decline was largely driven by the market impact of more than $4.0 billion, as well as net outflows of $2.2 billion.

We generated net operating income of $64.3 million and an operating margin of 42% in 2022. In managing our business, we focus on adjusted net operating income, which adjusts net operating income, as calculated in accordance with US generally accepted accounting principles ("GAAP"), for the impact of market movements on the deferred compensation plan investments that run through net operating income, and the impact of any mutual funds that we consolidate. Adjusted net operating income was $60.4 million in 2022, down from a record $83.7 million in 2021.1 Our adjusted operating profit margin was 39% in 2022, down from 46% in 2021.1 To have appropriate flexibility to deliver for each of our stakeholders, we target an adjusted operating margin of 30% to 40% over the long term.

Although our financial results were down from a record year in 2021, we were pleased with our ability to weather the storm brought on from the market environment in 2022 and continued to deliver solid financial results for our shareholders.

Capital Allocation

Our capital allocation approach is designed to grow the intrinsic value of the business by investing in new and existing strategies and ensuring we have sufficient capital to operate the business in

1 Adjusts the financial measures calculated in accordance with GAAP for the impact of market movements on the deferred compensation liability and related economic hedges, and the impact of the Diamond Hill International Fund and the Diamond Hill Large Cap Concentrated Fund (together, the "Consolidated Funds"). See the reconciliation to the comparable U.S. GAAP measures in the following Annex.

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any market environment. When we believe we have more capital than is necessary to achieve those aims, we return capital to shareholders.

We may repurchase shares when our shares are trading below our estimate of the firm's intrinsic value. We first initiated share repurchases in Q4 2018. Since then, we have repurchased approximately 742,000 shares totaling $111.2 million, which represents approximately 21% of our shares outstanding when we initiated our repurchases. Share repurchases in 2022 were approximately 217,000 shares totaling $38.7 million. Repurchases since Q4 2018 have been partially offset by the net issuance of approximately 220,000 shares in the form of compensation to our associates over that period. We believe share-based compensation is an important way to align our interests with shareholders. Overall, since we began our share repurchases in Q4 2018, we have reduced our total share count by 524,000 shares, or 15%.

After considering strategic uses of capital and share repurchases, we evaluate any excess capital for payment of shareholder dividends. In 2022, our dividends included a $1.50 per share regular quarterly dividend and a $4.00 per share special dividend, totaling $10.00 per share, or approximately $30.7 million. We have paid dividends for 15 consecutive years cumulatively totaling $133.00 per share.

Each year we will continue to consider paying a special dividend in Q4 after assessing our strategic capital deployment and share repurchases during the year.

Conclusion

We firmly believe the best way to generate strong long-term shareholder returns is to deliver excellent investment outcomes for our clients. Our investment team is intensely focused on generating alpha for our clients, and our entire firm is committed to developing and maintaining partnerships that help instill the confidence required to remain invested through full market cycles. This perspective has enabled us to grow new and existing client relationships, which ultimately helps us deliver returns to our shareholders.

Over the last few years, markets have been heavily influenced by a global pandemic, the largest armed conflict Europe has seen since WWII, a highly abnormal rise in inflation and a dramatic shift in global monetary policies. Through this period, I'm proud of the dedication our associates demonstrated to remain focused on delivering for clients. Over the last several years, we have put in place talented leadership and streamlined our strategies to elevate our competitive advantages - strategies where we are confident in our long-term ability to deliver compelling investment returns for clients.

A lot of uncertainty remains in the macroeconomic environment across many of the world's largest economies. We believe this environment presents opportunities for those focused on actively managing concentrated portfolios with a valuation discipline and long-term ownership mindset, and we look forward to delivering for our clients and shareholders in the years to come.

Sincerely,

Heather Brilliant

Chief Executive Officer and President

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