Washington, D.C. 20549
Form 10-K
(Mark One) | | | | | |
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20172023
or
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-24498
DIAMOND HILL INVESTMENT GROUP, INC.
(Exact name of registrant as specified in its charter)
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| Ohio | | 65-0190407 |
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Ohio | | 65-0190407 |
(State of
incorporation)
| | (I.R.S. Employer
Identification No.)
|
325 John H. McConnell Blvd, Suite 200, Columbus, Ohio 43215 |
| | |
325 John H. McConnell Blvd., Suite 200,
Columbus, Ohio 43215
| | 43215 |
(Address of principal executive offices) | | (Zip(Address of principal executive offices) (Zip Code) |
Registrant's
Registrant’s telephone number, including area code: (614) 255-3333
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | | Trading Symbol | | Name of each exchange on which registered |
| Common shares, no par value | | DHIL | | The NASDAQNasdaq Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨☐ No x☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨☐ No x☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No ¨☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K x☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer | | ¨☐ | | Accelerated filer | | x☒ |
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| Non-accelerated filer | | ¨ (Do not check if a smaller reporting company)
☐ | | Smaller reporting company | | ¨☐ |
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| | | | Emerging growth company | | ¨ | | | | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of
the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.
7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No x☒
AggregateThe aggregate market value of the registrant’s common shares (the only common equity of the registrant) held by non-affiliates of the registrant,on The Nasdaq Global Select Market was $483,389,072, based on the closing price of $199.40$171.30 on June 30, 2017 on the NASDAQ Global Select Market was $640,892,537. Calculation2023. For these purposes only, calculation of holdings by non-affiliates is based upon the assumption for these purposes only, that the registrant’s executive officers and directors are affiliates.
The number of shares outstanding of the issuer's common stock, asAs of February 22, 2018, is 3,488,75228, 2024, the registrant had 2,843,585 outstanding common shares.
Documents Incorporated by Reference
Portions of the registrant’s definitive proxy statementProxy Statement for the 2018its 2024 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, are incorporated by reference into Part III of this report.
Annual Report on Form 10-K.
Diamond Hill Investment Group, Inc.
Form 10-K
For the Fiscal Year Ended December 31, 20172023
Index
PART I
Cautionary Note Regarding Forward-Looking Statements
Throughout thisThis Annual Report on Form 10-K (this “Form 10-K”), the documents incorporated herein by reference and statements, whether oral or written, made from time to time by representatives of Diamond Hill Investment Group, Inc. (the "Company," "we," "us", an Ohio corporation organized in 1990 (“DHIL”, and "our"collectively with its subsidiaries, the “Company,” “we,” “our,” and “us”), may make forward-looking statementscontain or incorporate “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, as amended (the “PSLR Act”), 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 relating(the “Exchange Act”). Such statements are provided under the “safe harbor” protection of the PSLR Act. Forward-looking statements include, but are not limited to, such matters asstatements regarding anticipated operating results, prospects and levels of assets under management, technological developments, economic trends (including interest rates and market volatility), expected transactions and similar matters. The words “may,” “believe,” “expect,” “anticipate,” “target,” “goal,” “project,” “estimate,” “guidance,” “forecast,” “outlook,” “would,” “will,” “continue,” “likely,” “should,” “hope,” “seek,” “plan,” “intend”“intend,” and variations of such words and similar expressions identify such forward-looking statements. Similarly, descriptions of the Company’s objectives, strategies, plans, goals, or targets are also forward-looking statements. Forward-looking statements thatare based on our expectations at the time such statements are made, speak only as of the date thereof.dates they are made and are susceptible to a number of risks, uncertainties and other factors. While we believethe Company believes that the assumptions underlying ourits forward-looking statements are reasonable, investors are cautioned that any of the assumptions could prove to be inaccurate and, accordingly, ourthe Company's actual results and experiences couldmay differ materially from the anticipated results or other expectations expressed in ourits forward-looking statements.
Factors that couldmay cause such actual results or experiences to differ materially from results discussed in the forward-looking statements include, but are not limited to: the adverse effect from a decline(i) any reduction in the securities markets;Company's assets under management (“AUM”) or assets under advisement (“AUA”); (ii) withdrawal, renegotiation, or termination of 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) challenges from industry trends towards lower fee strategies and model portfolio arrangements; (vii) adverse regulatory and legal developments; (viii) unfavorable changes in tax laws or limitations; (ix) interruptions in or failure to provide critical technological service by the Company or third parties; (x) adverse civil litigation and government investigations or proceedings; (xi) failure to adapt to or successfully incorporate technological changes, such as artificial intelligence, into the Company’s business; (xii) risk of loss on the Company's investments; (xiii) lack of sufficient capital on satisfactory terms; (xiv) losses or costs not covered by insurance; (xv) a decline in the performance of ourthe Company's products; (xvi) changes in interest rates;rates and inflation; (xvii) changes in national and local economic and political conditions; (xix) the continuing economic uncertainty in various parts of the world; changes(xviii) the after-effects of the COVID-19 pandemic and the actions taken in government policyconnection therewith; (xx) political uncertainty caused by, among other things, political parties, economic nationalist sentiments, tensions surrounding the current socioeconomic landscape; and regulation, including monetary policy; changes in our ability to attract or retain key employees; unforeseen costs and other effects related to legal proceedings or investigations of governmental and self-regulatory organizations; and(xix), other risks identified from time-to-time in otherour public documents on file with the U. S.U.S. Securities and Exchange Commission (“SEC”), including those discussed below in Item 1A. Throughout1A of this Annual ReportForm 10-K.
Forward-looking statements attributable to the Company or any person acting on its behalf are expressly qualified in their entirety by the cautionary statements above, in Item 1A of this Form 10-K, when we useand in our other public documents on file with the termsSEC. New risks and uncertainties arise from time to time, and factors that the “Company,” “management,” “we,” “us,”Company currently deems immaterial may become material, and “our,” we mean Diamond Hill Investment Group, Inc.it is impossible for the Company to predict these events or how they may affect it. The Company undertakes no obligation to update any forward-looking statements after the date they are made, whether as a result of new information, future events or developments, except as required by federal securities laws, although it may do so from time to time. Readers are advised to consult any further disclosures the Company makes on related subjects in its public announcements and its subsidiaries.SEC filings. The Company does not endorse any projections regarding future performance that may be made by third parties.
Overview
The Company, an Ohio corporation organized in April 1990,DHIL derives its consolidated revenue and net income from investment advisory and fund administration services provided by its wholly owned subsidiary, Diamond Hill Capital Management, Inc., an Ohio corporation (“DHCM”). DHCM is a registered investment adviser under the Investment Advisers Act of 1940.1940, as amended (the “Advisers Act”), and is the investment adviser and administrator for the Diamond Hill Funds, a series of open-end mutual funds (each a “Fund,” and collectively, the “Funds”). DHCM sponsors, distributes, andalso provides investment advisory and related services to clients throughthe Diamond Hill Funds (the "Funds"Micro Cap Fund, LP (“DHMF”), institutionala private fund, as well as, separately managed accounts, an exchange traded fund,collective investment trusts (“CITs”), other pooled vehicles including sub-advised funds, and private investment funds. In July of 2016, the Company sold two former wholly owned operating subsidiaries, Beacon Hill Fund Services, Inc. (“BHFS”) and BHIL Distributors, Inc. (“BHIL” and collectively "Beacon Hill"). Until its sale, Beacon Hill provided fund administration and statutory underwriting services.model delivery programs.
The Company’s primary objective is to fulfill our fiduciary duty to our clients. Our secondary objective isCompany believes focusing on generating excellent, long-term investment outcomes and building enduring client partnerships will enable it to grow theits intrinsic value of the Company in order to achieve an adequatea compelling, long-term return for ourits shareholders.
Investment Advisory Activities
Clients
The Company providesaccomplishes this through its shared investment advisory services toprinciples, including: (i) valuation-disciplined active portfolio management, (ii) fundamental bottom-up research, (iii) a broad range of clients, including corporations, mutual funds, retirement plans, public pension funds, endowments, foundations, financial institutionslong-term, business-owner mindset, and high net worth individuals. We strive to expand our(iv) a client base by attracting new clients and earning additional business from existing clients.
Investment Philosophy
We believe intrinsic valuealignment philosophy that ensures clients’ interests come first. Client alignment is independent of market price andemphasized through: (i) a strategic capacity discipline that competitive long-term returns can be achieved by identifying meaningful differences between the two. We believe we can identify those market opportunities and deliver value through our shared commitment to an intrinsic value-based investment philosophy, long-term perspective, and disciplined approach to active investment management.
Investment Process
DHCM’s equity investment process begins with fundamental research focusing on estimating a company’s intrinsic value independent of its current stock price. Bottom-up analysis, which takes into consideration earnings, revenue growth, operating margins and other economic factors, is of primary importance in estimating the intrinsic value of an individual company. A five-year discounted cash flow analysis is the primary methodology we use to determine whether there is a discrepancy between the current market price and DHCM’s estimate of intrinsic value. To forecast the amount and timing of cash flows, our research analysts concentrate on the fundamental economic drivers of the business, including competitive positioning, quality of management, and balance sheet strength. Research analysts also evaluate each company within the context of sector and
industry secular trends. Key factors in analyzing sectors and industries include relative pricing power, ability to earn excess returns, long-term capital flow, and other fundamental factors.
DHCM also applies an intrinsic value philosophy and process to the analysis of fixed income securities. Our fixed income investment process is driven by security selection, sector allocation, yield curve positioning, and duration management in concert with the overall management of a high quality portfolio. We seekprotects portfolio managers’ abilities to generate excess return throughreturns, (ii) personal investment by portfolio managers in the selectionstrategies they manage, (iii) portfolio manager compensation being driven by long-term investment results in client portfolios, and (iv) a fee philosophy focused on a fair sharing of undervalued securitiesthe economics among clients, employees, and spread sectors that offer incremental yieldshareholders. The Company’s core cultural values of curiosity, ownership, trust, and total return in comparison to a benchmark index. We believe that our team of industry specialistsrespect create an environment where investment professionals focus on investment results and theirall teammates focus on the entire capital structure of a business often give us an information advantage over our peers.
DHCM believes that many investors’ short-term focus hinders their long-term results, which creates market inefficiencies and therefore opportunities. In addition, not all investors are valuation sensitive. We believe that we can exploit these market anomalies/inefficiencies by possessing a long-term investment temperament and practicing a consistent and repeatable intrinsic value-focused approach to investing.
Investment Advisory Feesoverall client experience.
The Company’sCompany offers a variety of investment strategies designed for long-term strategic allocations from institutionally oriented investors in key asset classes, aligning its investment team’s competitive advantages with its clients’ needs.
Assets Under Management
DHCM’s principal source of revenue is investment advisory fee income earned from managing client accounts under investment advisory and sub-advisory agreements. The fees earned depend on the type of investment strategy, account size, and servicing requirements. RevenuesDHCM’s revenues depend largely on the total value and composition of assets under management (“AUM”).its AUM. Accordingly, net cash flows from clients, market fluctuations, in client portfolios, and the composition of AUM impact ourthe Company’s revenues and results of operations. WeDHCM also havehas certain agreements whichthat allow usit to earn variable rateperformance-based fees in the event thatif investment returns exceed targeted amounts duringover a specified measurement period.
Investment StrategiesModel Delivery Programs - Assets Under Advisement
DHCM provides strategy-specific model portfolios to sponsors of model delivery programs. DHCM is paid for its services by the program sponsors at a pre-determined rate based on AUA in the model delivery programs. DHCM does not have discretionary investment authority over individual client accounts in the model delivery programs, and therefore, the AUA is not included in the Company’s AUM.
The Company offers several traditionalCompany’s revenues are highly dependent on both the value and alternative investment strategies, which are all based on the same intrinsic value philosophy. Ascomposition of December 31, 2017, we offered the following representative investment strategies to our clients:
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1. | Small Cap - Pursues long-term capital appreciation by investing in a portfolio of primarily small capitalization U.S. equity securities.
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2. | Small-Mid Cap - Pursues long-term capital appreciation by investing in a portfolio of primarily small and medium capitalization U.S. equity securities.
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3. | Mid Cap - Pursues long-term capital appreciation by investing in a portfolio of primarily medium capitalization U.S. equity securities.
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4. | Large Cap - Pursues long-term capital appreciation by investing in a portfolio of primarily large capitalization U.S. equity securities.
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5. | All Cap Select - Pursues long-term capital appreciation by investing in a concentrated portfolio of primarily U.S. equity securities across a broad range of market capitalizations.
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6. | Long-Short - Pursues long-term capital appreciation by investing long and selling short primarily U.S. equity securities across a broad range of market capitalizations.
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7. | Research Opportunities - Pursues long-term capital appreciation by investing long and selling short U.S. equity securities across a broad range of market capitalizations, as well as by investing up to 20% in international equity securities and up to 20% in fixed income securities.
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8. | Financial Long-Short - Pursues long-term capital appreciation by investing long and selling short primarily U.S. financial services equity securities across a broad range of market capitalizations.
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9. | Valuation-Weighted 500 - Pursues long-term capital appreciation by investing in large capitalization U.S. equity securities that seek to track the price and total return of the Diamond Hill Valuation-Weighted 500 Index.
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10. | Short Duration Total Return - Pursues maximization of total return consistent with the preservation of capital by investing in high, medium, and low-grade fixed income securities.
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11. | Core Bond - Pursues maximization of total return consistent with the preservation of capital by investing in a diversified portfolio of intermediate and long-term fixed income securities.
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12. | Corporate Credit - Pursues high current income, preservation of capital, and total return over a five-year time horizon by investing primarily in corporate bonds across the credit spectrum.
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13. | High Yield - Pursues high current income with the opportunity for capital appreciation by investing primarily in below-investment grade corporate bonds.
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As of January 1, 2018, the Company converted the Diamond Hill Global Fund, L.P. into the Diamond Hill Global Fund. The Diamond Hill Global Fund pursues long-term capital appreciation by investing in U.S.AUM and foreign equity securities of any size, or from any country, including emerging markets.
Investment Results
The Company believes that one of the most important characteristics exhibited by the best investment firms is excellent investment returns for their clients over a long period of time. We are pleased that during our history as an investment advisory firm, we have delivered what we believe are strong long-term investment returns for our clients. Investment returns have been a key driver in the long-term success we have achieved in growing AUM.
Absolute returns for all of our investment strategies were positive in 2017, and as of December 31, 2017, the since-inception returns for nearly all of our strategies exceeded their respective benchmark returns. Our Mid Cap, Short Duration Total Return, Core Bond, and High Yield strategies have less than a five-year track record and, as always, we remain focused on a minimum of five-year periods to evaluate our results.
AUA. The following is a summary of the investment returns for each of our Funds as of December 31, 2017, relative to its respective passive benchmark.
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| As of December 31, 2017 |
| | Inception | | 1 Year | | 3 Year | | 5 Year | | 10 Year | | Since Inception |
| Diamond Hill Small Cap Fund | 12/29/2000 | | 10.95 | % | | 7.02 | % | | 12.48 | % | | 8.45 | % | | 11.02 | % |
| Russell 2000 Index |
| | 14.65 | % | | 9.96 | % | | 14.12 | % | | 8.71 | % | | 8.47 | % |
| Diamond Hill Small-Mid Cap Fund | 12/30/2005 | | 8.63 | % | | 9.16 | % | | 14.61 | % | | 10.43 | % | | 9.46 | % |
| Russell 2500 Index |
| | 16.81 | % | | 10.07 | % | | 14.33 | % | | 9.22 | % | | 9.10 | % |
| Diamond Hill Mid Cap Fund | 12/31/2013 | | 10.47 | % | | 9.68 | % | | NA |
| | NA |
| | 9.24 | % |
| Russell Midcap Index | | | 18.52 | % | | 9.58 | % | | NA |
| | NA |
| | 10.48 | % |
| Diamond Hill Large Cap Fund | 6/29/2001 | | 20.30 | % | | 10.99 | % | | 15.64 | % | | 8.54 | % | | 8.96 | % |
| Russell 1000 Index |
| | 21.69 | % | | 11.23 | % | | 15.71 | % | | 8.59 | % | | 7.22 | % |
| Diamond Hill All Cap Select Fund | 12/30/2005 | | 20.33 | % | | 9.25 | % | | 16.00 | % | | 8.61 | % | | 8.84 | % |
| Russell 3000 Index |
| | 21.13 | % | | 11.12 | % | | 15.58 | % | | 8.60 | % | | 8.88 | % |
| Diamond Hill Long-Short Fund | 6/30/2000 | | 5.99 | % | | 4.93 | % | | 8.89 | % | | 4.55 | % | | 6.93 | % |
| 60% Russell 1000 Index / 40% ICE BofAML U.S. T-Bill 0-3 Mo Index |
| | 12.92 | % | | 6.88 | % | | 9.39 | % | | 5.52 | % | | 4.36 | % |
| Diamond Hill Research Opportunities Fund | 3/31/2009 | | 13.34 | % | | 5.77 | % | | 10.99 | % | | NA |
| | 13.49 | % |
| 75% Russell 3000 Index / 25% ICE BofAML U.S. T-Bill 0-3 Mo Index | | | 15.74 | % | | 8.44 | % | | 11.65 | % | | NA |
| | 13.05 | % |
| Diamond Hill Financial Long-Short Fund | 8/1/1997 | | 11.90 | % | | 8.41 | % | | 13.66 | % | | 5.42 | % | | 7.79 | % |
| 80% Russell 3000 Financials Index / 20% ICE BofAML U.S. T-Bill 0-3 Mo Index |
| | 15.92 | % | | 10.12 | % | | 13.51 | % | | 4.57 | % | | 5.63 | % |
| Diamond Hill Short Duration Total Return Fund | 7/5/2016 | | 4.33 | % | | NA |
| | NA |
| | NA |
| | 3.76 | % |
| Bloomberg Barclays U.S. 1-3 Yr. Gov./Credit Index | | | 0.84 | % | | NA |
| | NA |
| | NA |
| | 0.26 | % |
| Diamond Hill Core Bond Fund | 7/5/2016 | | 4.17 | % | | NA |
| | NA |
| | NA |
| | 1.29 | % |
| Bloomberg Barclays U.S. Aggregate Index | | | 3.54 | % | | NA |
| | NA |
| | NA |
| | 0.15 | % |
| Diamond Hill Corporate Credit Fund | 9/30/2002 | | 7.87 | % | | 7.10 | % | | 5.78 | % | | 7.07 | % | | 7.28 | % |
| ICE BofAML U.S. Corporate & High Yield Index |
| | 6.66 | % | | 4.34 | % | | 3.94 | % | | 6.02 | % | | 6.26 | % |
| Diamond Hill High Yield Fund | 12/4/2014 | | 10.36 | % | | 8.25 | % | | NA |
| | NA |
| | 8.17 | % |
| ICE BofAML U.S. High Yield Index | | | 7.48 | % | | 6.39 | % | | NA |
| | NA |
| | 6.02 | % |
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- | Fund returns are Class I shares net of fees |
- | Index returns do not reflect any fees |
Assets Under Management
The following tables showCompany’s AUM by product and investment objective, as well as net client cash flows,strategy, a roll-forward of the change in AUM, and a summary of AUA for each of the past five years ended December 31, 2017:2023:
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| Assets Under Management and Assets Under Advisement
As of December 31, |
| (in millions) | 2023 | | 2022 | | 2021 | | 2020 | | 2019 |
| Diamond Hill Funds | $ | 15,879 | | | $ | 14,745 | | | $ | 19,786 | | | $ | 17,615 | | | $ | 16,148 | |
| Separately managed accounts | 6,617 | | | 6,220 | | | 7,232 | | | 5,611 | | | 5,222 | |
| Collective investment trusts | 1,359 | | | 1,040 | | | 603 | | | 318 | | | 30 | |
| Other pooled vehicles | 3,563 | | | 2,758 | | | 3,407 | | | 2,867 | | | 1,999 | |
| Total AUM | 27,418 | | | 24,763 | | | 31,028 | | | 26,411 | | | 23,399 | |
| Total AUA | 1,746 | | | 1,802 | | | 2,098 | | | 1,099 | | | 933 | |
| Total AUM and AUA | $ | 29,164 | | | $ | 26,565 | | | $ | 33,126 | | | $ | 27,510 | | | $ | 24,332 | |
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| | Assets Under Management
As of December 31, |
| (in millions) | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Proprietary funds | $ | 15,974 |
| | $ | 13,618 |
| | $ | 11,505 |
| | $ | 9,863 |
| | $ | 7,600 |
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| Sub-advised funds | 1,518 |
| | 1,445 |
| | 665 |
| | 665 |
| | 444 |
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| Institutional accounts | 4,825 |
| | 4,318 |
| | 4,671 |
| | 5,128 |
| | 4,142 |
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| Total AUM | $ | 22,317 |
| | $ | 19,381 |
| | $ | 16,841 |
| | $ | 15,656 |
| | $ | 12,186 |
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| Assets Under Management
by Investment Strategy
As of December 31, |
| (in millions) | 2023 | | 2022 | | 2021 | | 2020 | | 2019 |
| U.S. Equity | | | | | | | | | |
| Large Cap | $ | 17,307 | | | $ | 16,478 | | | $ | 21,285 | | | $ | 15,075 | | | $ | 12,316 | |
| Small-Mid Cap | 2,588 | | | 2,646 | | | 3,183 | | | 2,810 | | | 3,243 | |
| Mid Cap | 1,023 | | | 899 | | | 1,165 | | | 992 | | | 569 | |
| Select | 593 | | | 392 | | | 438 | | | 446 | | | 528 | |
| Small Cap | 255 | | | 306 | | | 597 | | | 556 | | | 795 | |
| Large Cap Concentrated | 98 | | | 99 | | | 64 | | | 27 | | | 28 | |
| Micro Cap | 21 | | | 15 | | | 16 | | | — | | | — | |
| Total U.S. Equity | 21,885 | | | 20,835 | | | 26,748 | | | 19,906 | | | 17,479 | |
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| Alternatives | | | | | | | | | |
| Long-Short | 1,725 | | | 1,752 | | | 1,998 | | | 2,056 | | | 3,605 | |
| Total Alternatives | 1,725 | | | 1,752 | | | 1,998 | | | 2,056 | | | 3,605 | |
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| Global/International Equity | | | | | | | | | |
| International | 109 | | | 52 | | | 56 | | | 17 | | | 13 | |
Global(a) | — | | | — | | | — | | | 16 | | | 22 | |
| Total Global/International Equity | 109 | | | 52 | | | 56 | | | 33 | | | 35 | |
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| Fixed Income | | | | | | | | | |
| Short Duration Securitized Bond | 1,948 | | | 1,308 | | | 1,613 | | | 1,132 | | | 809 | |
| Core Fixed Income | 1,735 | | | 792 | | | 622 | | | 541 | | | 300 | |
| Long Duration Treasury | 26 | | | 33 | | | 51 | | | 62 | | | 52 | |
Corporate Credit(b) | — | | | — | | | — | | | 2,020 | | | 1,147 | |
High Yield(b) | — | | | — | | | — | | | 724 | | | 135 | |
| Total Fixed Income | 3,709 | | | 2,133 | | | 2,286 | | | 4,479 | | | 2,443 | |
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| Total-All Strategies | 27,428 | | | 24,772 | | | 31,088 | | | 26,474 | | | 23,562 | |
(Less: Investments in affiliated funds)(c) | (10) | | | (9) | | | (60) | | | (63) | | | (163) | |
| Total AUM | 27,418 | | | 24,763 | | | 31,028 | | | 26,411 | | | 23,399 | |
Total AUA(d) | 1,746 | | | 1,802 | | | 2,098 | | | 1,099 | | | 933 | |
| Total AUM and AUA | $ | 29,164 | | | $ | 26,565 | | | $ | 33,126 | | | $ | 27,510 | | | $ | 24,332 | |
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| | Assets Under Management
by Investment Strategy
As of December 31, |
| (in millions) | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Small Cap | $ | 1,525 |
| | $ | 1,843 |
| | $ | 1,703 |
| | $ | 1,575 |
| | $ | 1,402 |
|
| Small-Mid Cap | 3,528 |
| | 3,329 |
| | 2,070 |
| | 1,279 |
| | 780 |
|
| Mid Cap | 130 |
| | 59 |
| | 18 |
| | 16 |
| | — |
|
| Large Cap | 10,867 |
| | 8,497 |
| | 7,547 |
| | 7,926 |
| | 6,254 |
|
| All Cap Select | 450 |
| | 404 |
| | 545 |
| | 432 |
| | 327 |
|
| Long-Short | 4,980 |
| | 4,613 |
| | 4,597 |
| | 4,179 |
| | 3,213 |
|
| Corporate bonds | 699 |
| | 581 |
| | 361 |
| | 249 |
| | 210 |
|
| Core fixed income | 357 |
| | 237 |
| | — |
| | — |
| | — |
|
(Less: Investments in affiliated funds)(a) | (219 | ) | | (182 | ) | | — |
| | — |
| | — |
|
| Total AUM | $ | 22,317 |
| | $ | 19,381 |
| | $ | 16,841 |
| | $ | 15,656 |
| | $ | 12,186 |
|
(a) CertainThe Diamond Hill Global Fund was liquidated on December 17, 2021.
(b) The Diamond Hill Corporate Credit and the Diamond Hill High Yield investment advisory contracts (the “High Yield-Focused Advisory Contracts”) were sold to Brandywine Global Investment Management, LLC (“Brandywine Global”) effective July 30, 2021.
(c) Certain of the Funds own shares of the Diamond Hill Short Duration Total ReturnSecuritized Bond Fund. The Company reduces itsthe total AUM of each Fund that holds such shares by thesethe AUM of the investments held in this affiliated fund. Fund.
(d) AUA is primarily comprised of model portfolio assets related to the Large Cap and Select strategies.
| | | | Change in Assets Under Management
For the Year Ended December 31, |
| Change in Assets Under Management
For the Year Ended December 31, | | | Change in Assets Under Management
For the Year Ended December 31, |
| (in millions) | 2017 | | 2016 | | 2015 | | 2014 | | 2013 | (in millions) | 2023 | | 2022 | | 2021 | | 2020 | | 2019 |
| AUM at beginning of the year | $ | 19,381 |
| | $ | 16,841 |
| | $ | 15,656 |
| | $ | 12,186 |
| | $ | 9,429 |
|
| Net cash inflows (outflows) |
| |
| |
| |
| |
|
| proprietary funds | 843 |
| | 548 |
| | 1,916 |
| | 1,618 |
| | 713 |
|
| sub-advised funds | (164 | ) | | 639 |
| | (6 | ) | | 166 |
| | (758 | ) |
| institutional accounts | (254 | ) | | (1,023 | ) | | (443 | ) | | 478 |
| | (263 | ) |
| 425 |
| | 164 |
| | 1,467 |
| | 2,262 |
| | (308 | ) |
| Diamond Hill Funds | |
| Diamond Hill Funds | |
| Diamond Hill Funds | |
| Separately managed accounts | |
| Collective investment trusts | |
| Other pooled vehicles | |
| (494) | |
| Sale of High Yield-Focused Advisory Contracts | |
| Net market appreciation/(depreciation) and income | 2,511 |
| | 2,376 |
| | (282 | ) | | 1,208 |
| | 3,065 |
|
| Increase during the year | 2,936 |
| | 2,540 |
| | 1,185 |
| | 3,470 |
| | 2,757 |
|
| Increase (decrease) during the year | |
| AUM at end of the year | $ | 22,317 |
| | $ | 19,381 |
| | $ | 16,841 |
| | $ | 15,656 |
| | $ | 12,186 |
|
| AUA at end of year | |
| Total AUM and AUA at end of year | |
Capacity
The Company’s primary goal is to fulfill our fiduciary duty to clients. We understand that our ability to retain and grow assets as a firmits AUM has been, and will continue to be, primarily driven primarily by delivering attractive long-term investment results, which requires adherence to our clients. When we have determined thatcapacity discipline. If the Company determines the size of any of our strategies hinders oura strategy could impede its ability to add value over a passive alternative, we have closed those strategiesmeet investment return goals, the Company will close that strategy to new clients and we will continueclients. The Company’s commitment to do so, which will impact ourcapacity discipline inherently impacts its ability to grow its AUM. We haveInvestment results will always be prioritized and will continue to prioritize, investment results over asset accumulation. Currently, the Long-Short, Small Cap, and Small-Mid Cap strategies are closed to new investors.
We estimateThe Company’s capacity of $25 - 35 billion for our existing equity strategies ($21.3 billion as of December 31, 2017) and capacity of at least2023 was estimated to be $40 billion for our existingto $50 billion in domestic equities, $20 billion to $30 billion in international equities, and $50 billion to $65 billion in fixed income strategies ($1.0 billion as of December 31, 2017). Determining our AUM
income. The Company’s firm-level capacity requires evaluating each of our investment strategies and estimating individual strategy capacity, given market capitalization and concentration constraints as well as investment objectives. Total firm capacity is not simply a sum of the individual strategies and is affected by overlap between strategies. Withincreases with the development of new products or strategies.
Growth Strategy
The Company’s growth centers first and foremost on delivering an investment and client experience that enables investors to experience better outcomes over the long-term. The Company’s client alignment philosophy guides it to develop strategies our firm level capacity could increase.and offer vehicles that meet clients’ objectives, capitalize on its investment team’s research capabilities, and align with its investment principles.
The Company looks to attract like-minded, long-term focused clients across all of its offerings. To ensure efficient business development and relationship management, the Company has dedicated resources toward content-led marketing and sales enablement efforts. The Company believes that the combination of these efforts will lead to a deeper understanding of its investment strategies, and ultimately, longer holding periods for investors.
The Company focuses its efforts primarily on asset allocators with centralized research teams, allowing efficient delivery of services to a larger and more diverse client base. These highly sophisticated buyers conduct deep research and pair the Company’s strategies with complementary strategies to meet holistic client objectives. These asset allocators include centralized research teams at institutional consulting firms, wirehouses, banks, independent broker dealers, and independent registered investment advisory firms. The Company aims to partner with investors who maintain a long-term orientation and align with its investment principles.
Distribution Channels
The Company’sCompany offers a variety of investment advisory services are distributed through multiple channels. Our institutional sales efforts include building relationshipsstrategies designed for long-term strategic allocations from institutionally-oriented investors in key asset classes, aligning its investment team’s competitive advantages with institutional consultants and also establishing direct relationships with institutional clients. Our sales efforts for the Funds include wholesaling to third-party financial intermediaries, including independent registered investment advisers, brokers, financial planners, and wealth advisers, who utilize the Funds in investment programs they construct for their clients.
AUM by Channel
Belowits clients’ needs. The following table is a summary of our AUM by distribution channel for each of the five years ended December 31, 2017:2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| AUM and AUA by Distribution Channel
As of December 31, | |
| (in millions) | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | |
| Diamond Hill Funds: | | | | | | | | | | |
| Registered investment adviser | $ | 4,329 | | | $ | 3,787 | | | $ | 4,633 | | | $ | 4,315 | | | $ | 3,603 | | |
| Independent broker-dealer | 4,597 | | | 4,135 | | | 5,304 | | | 4,274 | | | 3,563 | | |
| Wirehouse | 2,902 | | | 2,843 | | | 4,195 | | | 3,529 | | | 3,026 | | |
| Bank trust | 1,777 | | | 1,718 | | | 2,256 | | | 2,546 | | | 2,907 | | |
| Defined contribution | 2,090 | | | 2,085 | | | 3,249 | | | 2,716 | | | 2,723 | | |
| Other | 184 | | | 177 | | | 149 | | | 235 | | | 326 | | |
| Total Diamond Hill Funds | 15,879 | | | 14,745 | | | 19,786 | | | 17,615 | | | 16,148 | | |
| Separately managed accounts: | | | | | | | | | | |
| Institutional consultant | 2,782 | | | 2,432 | | | 2,960 | | | 2,504 | | | 2,397 | | |
| Financial intermediary | 2,986 | | | 3,067 | | | 3,594 | | | 2,371 | | | 1,777 | | |
| Direct | 849 | | | 721 | | | 678 | | | 736 | | | 1,048 | | |
| Total separately managed accounts | 6,617 | | | 6,220 | | | 7,232 | | | 5,611 | | | 5,222 | | |
| Collective investment trusts | 1,359 | | | 1,040 | | | 603 | | | 318 | | | 30 | | |
| Other pooled vehicles | 3,563 | | | 2,758 | | | 3,407 | | | 2,867 | | | 1,999 | | |
| Total AUM | 27,418 | | | 24,763 | | | 31,028 | | | 26,411 | | | 23,399 | | |
Total AUA(a) | 1,746 | | | 1,802 | | | 2,098 | | | 1,099 | | | 933 | | |
| Total AUM and AUA | $ | 29,164 | | | $ | 26,565 | | | $ | 33,126 | | | $ | 27,510 | | | $ | 24,332 | | |
|
| | | | | | | | | | | | | | | | | | | |
| | AUM by Distribution Channel
As of December 31, |
| (in millions) | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Proprietary funds: | | | | | | | | | |
| Registered investment advisers | $ | 4,010 |
| | $ | 3,508 |
| | $ | 2,723 |
| | $ | 2,363 |
| | $ | 1,678 |
|
| Independent broker/dealers | 3,581 |
| �� | 2,922 |
| | 2,329 |
| | 1,862 |
| | 1,400 |
|
| Wirehouse broker/dealers | 2,660 |
| | 2,011 |
| | 1,963 |
| | 1,760 |
| | 1,261 |
|
| Banks | 3,456 |
| | 3,175 |
| | 2,735 |
| | 2,176 |
| | 1,668 |
|
| Defined contribution | 1,840 |
| | 1,535 |
| | 1,218 |
| | 1,232 |
| | 1,226 |
|
| Other | 427 |
| | 467 |
| | 537 |
| | 470 |
| | 367 |
|
| Total proprietary funds | 15,974 |
| | 13,618 |
| | 11,505 |
| | 9,863 |
| | 7,600 |
|
| Sub-advised funds | 1,518 |
| | 1,445 |
| | 665 |
| | 665 |
| | 444 |
|
| Institutional accounts: | | | | | | | | | |
| Institutional consultant | 2,357 |
| | 2,074 |
| | 2,370 |
| | 2,681 |
| | 1,965 |
|
| Financial intermediary | 1,691 |
| | 1,358 |
| | 1,474 |
| | 1,573 |
| | 1,488 |
|
| Direct | 777 |
| | 886 |
| | 827 |
| | 874 |
| | 689 |
|
| Total institutional accounts | 4,825 |
| | 4,318 |
| | 4,671 |
| | 5,128 |
| | 4,142 |
|
| Total AUM | $ | 22,317 |
| | $ | 19,381 |
| | $ | 16,841 |
| | $ | 15,656 |
| | $ | 12,186 |
|
Growth Strategy
The Company’s growth strategy will remain focused on achieving excellent investment results in all our strategies and providing the highest level(a) 100% of client service. We will continue to focus on the development of distribution channels to enable us to offer our various investment strategies to a broad array of clients. We seek to continue to grow our AUM through our proprietary funds, institutional accounts, and sub-advised funds. We have a targeted strategic business plan to further penetrate our existing distribution channels. Our business development efforts are focused on expanding the institutional consultant channel and plan sponsor network on the institutional side, as well as our intermediary network on the fund side.AUA is from financial intermediaries.
Fund Administration Activities
The CompanyDHCM provides fund administration services to the Funds. Fund administration services are broadly defined asto include the following services: portfolio and regulatory compliance,compliance; treasury and financial oversight,oversight; oversight of back-office service providers, such as the custodian, fund accountant, and transfer agent,agent; and general business management and governance of the mutual fund complex. Prior to the sale of Beacon Hill, the Company also provided fund administration services to other third party mutual fund companies and investment advisers.
Funds.
Competition
Competition in the area of investment management industry is intense, and ourDHCM’s competitors include investment management firms, broker-dealers, banks, and insurance companies, some of whom offer various investment alternatives, including passive index strategies. Many of DHCM’s competitors are better known, than the Company, offer a broader range of investment products, and have more offices, employees anddedicated resources for business development representatives. We compete primarily on the basisand marketing.
Regulation
The Company and our business areis subject to various federal, state, and foreignnon-U.S. laws and regulations. As a matter of public policy, regulatory bodies are charged with safeguarding the integrity of the securities and other financial markets, and with protecting the interests of participants in those markets, including investment advisory clients and shareholders of investment funds. UnderIf an adviser fails to comply with these laws and regulations, agencies that regulate investment advisersthese regulatory bodies have broad administrative powers, including the power to limit, restrict, or prohibit an investment adviser from carrying on its business in the event the adviser fails to comply with such laws and regulations.business. Possible sanctions that regulatory bodies may be imposedimpose include civil and criminal liability, the suspension of individual employees, limitations on engaging in certain lines of business for specified periods of time, revocation of investment adviser, broker/dealer,broker-dealer, and other registrations, censures, and fines.
DHCM is registered with the SEC under the Investment Advisers Act of 1940 (the “Advisers Act”) and operates in a highly regulated environment. The Advisers Act imposes numerous obligations on registered investment advisers, including fiduciary duties, recordkeeping requirements, operational requirements, and disclosure obligations. All Diamond Hillof the Funds are registered with the SEC under the Investment Company Act of 1940, as amended (“1940 Act”), and are required to make notice filings with all states where the Funds are offered for sale. Virtually all aspects of ourDHCM’s investment advisory and fund administration business are subject to various federal and state laws and regulations.
To the extent that DHCM is a “fiduciary” under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), with respect to benefit plan clients, itand therefore, is subject to ERISA regulations. ERISA and applicable provisions of the Internal Revenue Code of 1986, as amended, impose certain duties on persons who are fiduciaries, prohibit certain transactions involving ERISA plan clients, and provide monetary penalties for violations of these prohibitions. The U.S. Department of Labor, which administers ERISA, has been increasingly active in proposing and adopting regulations affecting the asset management industry.
The Company’sDHCM’s trading activities for client accounts are regulated by the SEC under the Securities Exchange Act, of 1934 (the “Exchange Act”), including lawswhich includes regulations governing trading on inside information, market manipulation, and a broad number of trading requirements (e.g., volume limitations, reporting obligations) and market regulation policiesrequirements in the United States.
The preceding descriptions of the regulatory and statutory provisions applicable to usDHCM are not exhaustive or complete and are qualified in their entirety by reference to theirthe respective statutory or regulatory provisions. Failure to comply with these requirements could have a material adverse effect on ourDHCM’s business.
Contractual Relationships with the Diamond Hill Funds
The CompanyDHCM is highly dependent on ourits contractual relationships with the Funds. In the event ourIf any of DHCM’s advisory or administration agreements with the Funds arewere terminated or not renewed, or were amended or modified to reduce fees, weDHCM would be materially and adversely affected. WeDHCM generated approximately 80%68%, 74%71%, and 75%69% of our 2017, 2016its 2023, 2022, and 20152021 revenues, respectively, from ourits advisory and administrative contractsadministration agreements with the Funds. We consider our relationshipDHCM believes that it has strong relationships with the Funds and their board of trustees, to be good, and haveDHCM has no reason to believe that these advisory or administration contracts will not be renewed in the future; however,future. However, there is no assurance that the Funds will choose to continue their relationships with the Company.DHCM. Please see Item 1A for risk factors regarding this relationship.
Human Capital
The Company believes its people are its greatest asset, and each role within the firm contributes to its goals of generating excellent, long-term investment outcomes and building enduring client partnerships.
Workforce Data
Attracting, developing, and retaining talented employees is integral to the Company’s human capital strategy and critical to its success. The Company depends on highly skilled personnel, with specialized expertise and extensive experience in the investment management industry. As of December 31, 2023 and December 31, 2022, the Company employed 129 full-time employees.
The average employee tenure is approximately eight years, and nearly one-third of its employees have been with the Company more than 10 years. The Company’s five-year average employee turnover rate is approximately 7%. The Company’s employees are based in 12 states, and approximately 80% of its employees reside in Ohio.
Competitive Pay and Benefits
The Company’s competitive compensation and benefits are designed to help attract, retain, and motivate employees who embody its values. The Company aligns its employees’ compensation with client outcomes, individual and team results, and company performance.
Culture
The Company’s culture emphasizes four key values: curiosity, ownership, trust and respect. The way its employees embody these core values creates the Company’s culture. The culture allows the Company to attract and retain employees who share its commitment to client alignment, are motivated by investment excellence, and are committed to delivering excellent outcomes.
Employees who are curious focus on continuous self-improvement and have a passion for learning. They are open-minded, seek differing perspectives, and go beyond surface-level assumptions. Employees who think and act like business owners naturally embrace a long-term mindset. They lead by example and accept accountability for ensuring strong client outcomes. Employees who embrace trust act with integrity, are authentic and honest in interactions with others, and put client interests ahead of all others. Employees who are motivated by giving and receiving respect communicate and provide feedback candidly, transparently, and with positive intent. They are humble in their assumptions and listen to better understand others. They embrace, value, and celebrate diversity, inclusion, and differences in all forms.
The Company’s culture revolves around the fact that DHCM is a fiduciary first and foremost. The primary focus is serving its clients. The Company’s long-term, valuation-disciplined investment principles are foundational to its culture and have been consistently implemented since the firm’s inception. All members of the investment team believe in, and adhere to, the same investment principles. The Company’s employees invest alongside its clients, and portfolio managers have significant personal investments in the strategy or strategies they manage.
Diversity, Equity, and Inclusion
The Company views diversity, equity, and inclusion (“DEI”) as essential parts of its business and operating model. DEI is embedded in the policies, practices, and strategic initiatives of the Company, and is linked to its core values. The Company believes clients are best served by decision making that engages and encourages varied perspectives.
As of December 31, 2017,2023, females represented 50% of DHIL’s board of directors (“Board”), 66% of the Company employed 118 full-time equivalentCompany’s management team, and approximately 32% of its employees. As of December 31, 2016,2023, racial or ethnic minorities represented approximately 14% of the numberCompany’s workforce and 17% of full-time equivalentthe Board. Please see additional demographic details on the Company’s website.
DEI is a continuous journey, and the Company recognizes that transparency and accountability are critical to driving real change within the firm, in the industry, and within its community. Learn more about the Company’s DEI philosophy, commitments and annual progress on the Company’s website. The information on our website, including our DEI annual reports, is not incorporated by reference in or otherwise considered a part of this Form 10-K or any other report or document we file with, or furnish to, the SEC. The Company’s DEI initiatives are driven by employees was 112. We believe that our relationship with our employees is good. Our employee count has grown year-over-yearacross functional teams who are enthusiastic about leading sustainable efforts under four areas of focus: workforce diversity, inclusive culture, vendor and we expect that general trend to continue.
policy, and philanthropy and community.
SEC Filings
The Company maintains an Interneta website at www.diamond-hill.com. Ourwww.diamond-hill.com. The Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, XBRL instance documents, Current Reports on Form 8-K, and amendments to those reports that we fileit files or furnishfurnishes from time-to-time pursuant to Section 13(a) or 15(d) of the Exchange Act, are made available free of charge, on or through ourthe Investor Relations section of the Company’s website, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The contents of our
Information contained on the Company’s website areis not incorporated into, or otherwise made a part of this Annual Report on Form 10-K. Our filings10-K or any other report or document that it files with, or furnishes to, the Commission may be read and copied at the Commission's Public Reference Room at 100F Street, NE, Washington, DC 20549.SEC. These filingsreports are also available free of charge on the Commission's web-siteSEC’s website at http://www.sec.gov free.
OurThe Company’s future results of operations, financial condition, and liquidity, and capital resources as well as the market price of ourits common shares, are subject to various risks, including those risks mentioned below and elsewhere in this Form 10-K as well as those risks that are discussed from time-to-time in ourthe Company’s other periodic filings with the SEC. Investors should carefully consider these risks along with the other information contained in this report, before making an investment decision regarding our common shares.the Company’s securities. There may be additional risks of which we arethe Company is currently unaware, or which wethe Company currently considerconsiders to be immaterial. The occurrence of any of these risks could have a material adverse effect on ourthe Company’s financial condition, results of operations, and liquidity, capital resources and the value of our common shares.its securities. Please see “Forward Looking Statements” within Part I, Item 1, of Part I of this Form 10-K. We assume no obligation to update any forward looking statements as a result of new information, future events or other factors.
Business Risks
Poor investment results or adverse ratings of ourthe Company’s products could affect ourits ability to attract new clients or could reduce the amount of assets under management,its AUM, potentially negatively impacting revenue and net income.
If we failthe Company fails to deliver acceptable investment results for ourits clients, both in the short and long term, we will likelylong-term, the Company could experience diminished investor interest and a decreased level of AUM. Adverse opinions of the funds we advise published by third parties, including rating agencies and industry analysts, could also decrease our AUM and our revenues.
Investment fundsstrategies are assessed and rated by independent third parties, including rating agencies, industry analysts, and publications. Investors can be influenced by such ratings. If any of the funds we advisea strategy receives an adverse report, it could negatively influenceimpact the amount of money invested into the fund and increase withdrawals from the fund reducing ourCompany’s AUM and our revenue.
OurThe Company’s success depends on ourits key personnel, and ourits financial performance could be negatively affected by the loss of their services.
OurThe Company’s success depends on highly skilled personnel, including portfolio managers, research analysts, and management, many of whom have specialized expertise and extensive experience in the investment management industry. Financial services professionals are in high demand, and we facethe Company faces significant competition for qualified employees. WithOther than the exception of R. H. Dillon, our Chairman and a portfolio manager, ourCompany’s Chief Executive Officer, its employees do not have employment contracts and generally can terminate their employment at any time. We cannot assure that we willThe Company may not be able to retain or replace key personnel. In order toTo retain or replace ourits key personnel, wethe Company may be required to increase compensation, which would decrease its net income. The loss of key personnel could damage ourthe Company’s reputation and make it more difficult to retain and attract new employees and clients. A loss of client assets resulting from the departure of key personnel may materially decrease ourthe Company’s revenues and net income.
Our Specifically, Charles Bath, a co-portfolio manager on our Large Cap strategy, which is our largest strategy by AUM which impacts revenue,and revenues, announced his retirement from the Company effective December 31, 2024. It is subjectpossible his departure could lead to significant fluctuations.
A large majority of our revenue is calculatedincreased redemptions resulting in a material decline in AUM and revenue. The Company has had a well-defined succession plan in place since 2018, when Austin Hawley was named co-portfolio manager on the Large Cap strategy. Mr. Hawley has worked closely with Mr. Bath for over 15 years, including the last six years as a percentage of AUM or is related to the general performance of the equity securities market. A decline in securities prices or in the sale of investment products, or an increase in fund redemptions, generally would reduce revenue and net income. Financial market declines would generally negatively impact the level of our AUM and consequently our revenue and net income. A recession or other economic or political events, both in the United States as well as globally, could also adversely impact our revenue, if such events led to a decreased demand for products, a higher redemption rate, or a decline in securities prices.co-portfolio manager.
OurThe Company’s investment results and/or the growth in ourits AUM may be constrained if appropriate investment opportunities are not available or if we closethe Company closes certain of our portfoliosits investment strategies to new investors.
OurThe Company’s ability to deliver strongexcellent investment results depends in large part on ourits ability to identify appropriate investment opportunities in which to invest client assets. If we arethe Company is unable to identify sufficient investment opportunities for existing and new client assets on a timely basis, ourits investment results could be adversely affected. The risk that appropriate investment opportunities may be unavailable is influenced by a number of factors, including general market conditions, and is likely to increase if ourthe Company’s AUM increases rapidly. The Company’s efforts to establish and develop new strategies may face challenges or ultimately be unsuccessful, which could impact its results of operations, reputation, and/or culture. In addition, if we determinethe Company determines that sufficient investment opportunities are not available for a portfolioan investment strategy, or we believeit believes that it is necessary in order to continue to produce attractive returns from a portfolio, wean investment strategy, the Company will consider closing the portfolio to new investors. As of December 31, 2017, we have closed three investment strategiesstrategy to new investors. If we misjudgethe Company misjudged the point at which it would be optimal to close a portfolio,an investment strategy, the investment results of the portfoliostrategy could be negatively impacted.
Our investment approach may underperform other investment approaches during certain market conditions.
Our The Company has closed investment strategies are best suited for investors with long-termin the past and may do so again in the future. As of December 31, 2023, the Company does not have any closed investment horizons. Our investment strategies may not perform well during certain periods of time, including during periods when the marketstrategies.
The Company is more narrowly focused on growth-oriented stocks.
Additionally, since we apply the same intrinsic value investment process across all of our strategies, utilizing the same analyst team, and due to overlap in many of our investment strategies, we could have common positions and industry concentrations across many of our strategies at the same time. As such, factors leading one of our investment strategies to underperform may lead other strategies to underperform at the same time.
We are subject to substantial competition in all aspects of ourits business.
OurThe Company’s investment products compete against a number of investment products and services from:
•assetAsset management firms;
•mutualMutual fund companies;
•commercialCommercial banks and thrift institutions;
•insuranceInsurance companies;
•exchange tradedExchange-traded funds;
•Private funds, including hedge funds and private equity funds; and
•brokerageBrokerage and investment banking firms.
Many of ourthe Company’s competitors have substantially greater resources than we have and may operate in more markets or offer a broader range of products, including passively managed or “index” products. Some of these institutions operate in a different regulatory environment, which may give them certain competitive advantages in the investment products and portfolio structures that they offer. We competeThe Company competes with other providers of investment services primarily based upon ourits philosophy, performance, and client service. Some institutions have a broadbroader array of products and distribution channels, that makewhich makes it more difficult for usthe Company to compete with them.compete. If current or potential customersclients decide to use one of ourthe Company’s competitors, weit could face a significant decline in market share, AUM, AUA, revenues, and net income. If we arethe Company is required to lower ourits fees in order to remain competitive, ourits net income could be significantly reduced because some of ourthe Company’s expenses are fixed, especially over shorter periods of time, and ourits expenses may not decrease in proportion to the decrease in revenues. Additionally, over the past several years, investors have generally shown a preference for passive investment products such as index and exchange traded funds, over actively managed strategies. If this trend continues, ourthe Company’s AUM, revenues, and net income may be negatively impacted.
Industry trends towards lower fee strategies and model portfolio arrangements could adversely impact the Company’s revenues.
Market and competitive pressures in recent years have created a trend towards lower management fees in the asset management industry and there can be no assurance that wethe Company will be able to maintain ourits current fee structure. As a result, a shift in ourin the Company’s AUM from higher to lower fee generating clients and strategies wouldcould result in a decrease in profitability even if ourits AUM increases or remains unchanged. Similarly, in recent years, there has been a trend in clients shifting their assets from higher fee mutual funds and separately managed accounts to lower fee model portfolio arrangements. As a result, a shift in the Company’s client assets from AUM to AUA could result in a decrease in Company revenues.
The loss of access to, or increased fees required by, third-party distribution sources to market ourthe Company’s portfolios and access ourits client base could adversely affect ourthe Company’s results of operations.
OurThe Company’s ability to attract additional AUM is dependent on ourits relationship with third-party financial intermediaries. We compensateThe Company compensates some of these intermediaries for access to investors and for various marketing services provided. These distribution sources and client bases may not continue to be accessible to usthe Company for reasonable terms, or at all. If such access is restricted or eliminated, it could have an adverse effect on ourthe Company’s results of operations. Fees paid to financial intermediaries for investor access and marketing services have generally increased in recent years. If such fee increases continue, refusal to pay them could restrict ourthe Company’s access to those client bases while paying them could adversely affect ourits profitability.
A significant portion of the Company’sDHCM's revenues are based on contractsadvisory and administration agreements with the Funds that are subject to termination without cause and on short notice.
The CompanyDHCM is veryhighly dependent on ourits contractual relationships with the Funds. If ourDHCM’s advisory or administration agreements with the Funds were terminated or not renewed, or were amended or modified to reduce fees, weDHCM would be materially and adversely affected. Generally, these agreements are terminable by either party upon 60 daysdays’ prior written notice without penalty. The Funds’ agreements are subject to annual approval by eithereither: (i) thetheir board of trustees, of the Funds or (ii) a vote of the majority of the outstanding voting securities of each Fund. TheThese agreements automatically terminate in the event of their assignment by either the CompanyDHCM or the Fund. WeFunds. DHCM generated approximately 80%68%, 74%71%, and 75%69% of our 2017, 2016its 2023, 2022, and 20152021 revenues, respectively, from ourits advisory and administrative contractsadministration agreements with the Funds, including 29%30%, 17%12%, and 12%10% from the advisory contracts with the Diamond Hill Long-Short Fund, Large Cap Fund, the Diamond Hill Long-Short Fund, and the Diamond Hill Small-Mid Cap Fund, respectively, during 2017.2023. The loss of any of the Long-Short Fund,
Diamond Hill Large Cap Fund, the Diamond Hill Long-Short Fund, or the Diamond Hill Small-Mid Cap Fund contracts would have a material adverse effect on the Company. We consider our relationshipDHCM. DHCM believes that it has strong relationships with the Funds and their board of trustees, to be good, and we haveit has no reason to believe that these advisory or administration contracts will not be renewed in the future; however,future. However, there can be no assurance that the Funds will choose to continue their relationships with us.DHCM.
Negative public opinion of the Company could cause it to lose clients and asset levels may be negatively impactedadversely affect its share price.
Negative public opinion can result from the Company’s actual or alleged conduct in any number of activities, including trading practices, corporate governance and acquisitions, DEI issues, social media and other marketing activities, and actions taken by fluctuationsgovernmental regulators and community organizations in our investment portfolio.
We currentlyresponse to any of the foregoing. Negative public opinion could adversely affect the Company’s ability to attract and maintain clients, could expose the Company to potential litigation or regulatory action, and could have a substantial portion of our assets invested in Company sponsored investments. All of these investments are subject to market risk and our non-operating investment income could be adversely affected bymaterial adverse market performance. Fluctuations in investment income are expected to occur in the future.
Changes in tax laws and unanticipated tax obligations could have an adverse impacteffect on our financial condition, results of operations and cash flow.
We are subject to federal, state and local income taxes in the United States. Tax authorities may disagree with certain positions we have takenits share price or implement changes in tax policy, which may result in heightened volatility.
Operational Risks
Cybersecurity attacks could prevent the assessment of additional taxes. We regularly assessCompany from managing client portfolios, cause the appropriateness of our tax positions and reporting. We cannot provide assurance, however, that we will accurately predict the outcomes of audits, and the actual outcomes of these audits could be unfavorable.
Unauthorizedunauthorized disclosure of sensitive or confidential client or customeremployee information whether through a breachor result in misappropriation of our computer systemsinformation or otherwise, or other breaches in the securityfunds, each of our systemswhich could severely harm ourits business.
As part of ourits business, we collect, processthe Company collects, processes, and transmittransmits sensitive and confidential information about ourits clients and employees, as well as proprietary information about ourits business. We haveThe Company has policies and procedures pursuant to which we takeit takes numerous security measures to prevent cyber-attackscyberattacks of various kinds as well as fraudulent and inadvertent activity by persons who have been granted access to such sensitive or confidential information. Nevertheless, ourthe Company’s systems, like all technology systems, remain vulnerable to unauthorized access, which can result in theft or corruption of information. In addition, we sharethe Company shares information with third partiesparty vendors upon whom we relyit relies for various functions. The systems of such third parties also are vulnerable to cyber threats. AttacksUnauthorized access can come from unrelated third parties through the internet, from access to hardware removed from our premisesthe Company’s or those of third partiesparties’ premises, or from employees acting intentionally or inadvertently.
CyberCybersecurity incidents can involve, among other things: (i) deliberate attacks designed to corrupt ourthe Company’s information systems and make them unusable by usthe Company to operate ourits business; thefts(ii) theft of information used by the perpetrators for gain in numerous ways;financial and other gain; or (iii) inadvertent releases of information by employees or third parties with whom we dothe Company does business.
Cyber-attacksCyberattacks that corrupt ourthe Company’s information systems and make them unusable by us could impair ourits ability to advise our clients on investments to be made.trade securities in its clients’ accounts. Corruption of the systems of ourthe Company’s third-party vendors could impact the Company to the same extent as corruption of ourits own systems. If information about ourthe Company’s employees or clients is intentionally stolen or inadvertently made public, that information could be used to commit identity theft, obtain credit in an employee'semployee’s or client’s name, or steal from an employee.employee or client. If information about ourthe Company’s business is obtained by unauthorized persons, whether through intentional attacks or inadvertent releases of information, it could be used to harm ourits competitive position.
Whether information is corrupted, stolen, or inadvertently disclosed, and regardless of the type and nature of the information whether it be(e.g., proprietary information about the Company’s business or personal information about clients or employees, the resultsemployees), it could have various adverse impacts on, and be multiple and materially harmful to, us.the Company, including the following:
Our•The Company’s reputation could be harmed, resulting in the loss of clients, vendors, and employees or making payments or concessions to such persons to maintain ourits relationships with them. them;
•The loss of key personnel or contracts with the Funds would be particularly harmful to our business.
OurCompany’s inability to operate ourits business fully, even if temporarily, and thus, fulfill contracts with clients or vendors, could result in terminationstermination of contracts and loss of revenue.revenue;
•Harm suffered by clients or vendors whose contracts we have been breached, or by clients, vendors, or employees whose information is compromised, could result in costly litigation against us.us;
Our•The Company’s need to focus attention on remediation of a cyber problemcybersecurity issue could take ourits attention away from the operation of ourits business, resulting in lost revenue.revenue;
We•The Company could incur costs to repair systems made inoperable by a cyber-attackcyberattack and to make changes to ourits systems to reduce future cyber threats. Those changes could include, among other things, obtaining additional technologies as well as employing additional personnel and training employees.employees;
•The interruption of ourthe Company’s business or theft of proprietary information could harm ourits ability to compete.compete; and
All•Any losses that the Company may be responsible to bear may not be covered by insurance.
Any of the above potential resultsimpacts of a cybercybersecurity incident could have a material adverse effect on the Company'sCompany’s business, financial condition, and results of operations.
The Company may not be able to adapt to technological change.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve clients while reducing costs. The Company’s future success depends, in part, upon its ability to address client needs by using technology to provide products and services that will satisfy client demands, as well as to create additional efficiencies in its operations. The Company may not be able to implement effectively new technology-driven products and services or be successful in marketing these products and services to its clients. Failure to successfully keep pace with technological changes affecting the financial services industry could negatively affect the Company’s growth, revenue, and profit.
The Company operates in an intensely competitive business environment. It may not be as successful as its competitors incorporating artificial intelligence (“AI”) into its business or adapting to a rapidly changing marketplace.
The Company’s competitors may be larger, more diversified, better funded, and have access to more advanced technology, including AI. These competitive advantages may enable its competition to innovate better and more quickly, or to compete more effectively on quality and price, which could cause the Company to lose business and profitability. Burgeoning interest in AI may increase competition and disrupt the Company’s business model. AI may lower barriers to entry in the industry and the Company may be unable to effectively compete with the products or services offered by new competitors. AI-related changes to the products and services on offer may affect customer expectations, requirements, or tastes in ways that the Company cannot adequately anticipate or adapt to, causing its business to lose revenues, market share, or the ability to operate profitably and sustainably.
Operational risks may disrupt ourthe Company’s business, result in losses, or limit ourits growth.
We areThe Company is dependent on the capacity and reliability of the communications, information, and technology systems supporting ourits operations, whether developed, owned, andor operated internally by the Company or by third parties. Operational risks, such as trading or operational errors, interruption of ourthe Company’s financial, accounting, trading, compliance, and other data processing systems, the loss of data contained in thesuch systems, or compromised systems due to cyber-attack,cyberattack, could result in a disruption of ourthe Company’s business, liability to clients, regulatory intervention, or reputational damage, and thus, adversely affect ourits business.
OurIndustry, Market, and Economic Risks
The Company’s AUM, which impacts revenue, is subject to significant fluctuations.
The majority of the Company’s revenue is calculated as a percentage of AUM or is related to the general performance of the equity securities markets. A decline in securities prices or in the sale of investment products, or an increase in fund redemptions, generally will reduce revenue and net income. Financial market declines will generally negatively impact the level of the Company’s AUM, and consequently, its revenue and net income. A recession or other economic or political events, whether in the United States or globally could also adversely impact the Company’s revenue, if such events led to a decreased demand for products, a higher redemption rate, or a decline in securities prices. Investor interest in the valuation of the Company’s fixed income strategies are affected by changes in interest rates and the overall credit environment. In addition, the majority of the Company’s existing AUM is managed in primarily long-only, equity investment strategies, which exposes it to greater risk than certain of its competitors who may manage assets in more diverse strategies.
The Company’s investment approach may underperform other investment approaches during certain market conditions.
The Company’s investment strategies are best suited for investors with long-term investment time horizons. The Company’s investment strategies may not perform well during certain periods of time. Additionally, the Company could have common positions and industry concentrations across its strategies at the same time. As such, factors leading to underperformance may impact multiple strategies simultaneously.
The Company’s investment income and asset levels may be negatively impacted by fluctuations in its investment portfolio.
The Company currently has a substantial portion of its assets invested in investment strategies that it manages. All of these investments are subject to market risk and the Company’s non-operating investment income could be adversely affected by market performance. Fluctuations in investment income are expected to occur in the future.
Trading in the Company’s common shares is limited, which may adversely affect the time and the price at which shareholders can sell their shares.
Although the Company’s common shares are listed on the The Nasdaq Global Select Market, the shares are held by a relatively small number of shareholders, and trading in its common shares is relatively inactive. The spread between the bid and the ask prices is often wide. As a result, shareholders may not be able to sell their shares on short notice, and the sale of a large number of shares at one time could temporarily depress the market price. In addition, certain shareholders, including certain of the Company’s directors and officers, own a significant number of shares. The sale of a large number of shares by any such individual could temporarily depress the market price of its shares.
Regulatory Risks
Changes in tax laws and unanticipated tax obligations could have an adverse impact on the Company’s financial condition, results of operations, and cash flow.
The Company is subject to federal, state, and local income taxes in the United States. Tax authorities may disagree with certain positions that the Company has taken or may implement changes in tax policy, which may result in the assessment of additional taxes on the Company. The Company regularly assesses the appropriateness of its tax positions and reporting. The Company cannot provide assurances, however, that tax authorities will agree with the positions it has taken, or that the Company will accurately predict the outcomes of audits, and the actual outcomes of these audits could be unfavorable.
The Company’s business is subject to substantial governmental regulation, which can change frequently and may increase costs of compliance;compliance, reduce revenue;revenue, result in fines, penalties, and lawsuits for noncompliance;noncompliance, and adversely affect ourits results of operations and financial condition.
OurThe Company’s business is subject to a variety of federal securities laws, including the Investment Advisers Act, ofthe 1940 the Investment Company Act, of 1940, the Securities Act, the Exchange Act, of 1934, the Sarbanes-Oxley Act of 2002, and the U.S. PATRIOT Act of 2001, and the Dodd-Frank Wall Street Reform and Consumer Protection Act.Act of 2010, each as amended. In addition, we arethe Company is subject to significant regulation and oversight by the SEC. Changes in legal, regulatory, accounting, tax, and compliance requirements could have a significant effect on ourthe Company’s operations and results, including, but not limited to, increased expenses and reduced investor interest in certain funds and other investment products we offer. Wethat the Company offers. The Company continually monitormonitors legislative, tax, regulatory, accounting, and compliance developments that could impact ourits business. WeThe Company and ourits directors, officers, and employees could be subject to lawsuits or regulatory proceedings for violations of such laws and regulations, which could result in the payment of fines or penalties and cause reputational harm to us. Such harmthe Company, which could negatively affect ourits financial condition and results of operations, as well as divert management'smanagement’s attention from its operations.
We continueGeneral Risk Factors
The Company’s insurance policies may not cover all losses and costs to seekwhich it may be exposed.
The Company carries insurance in amounts and under terms that it believes are appropriate. The Company’s insurance may not cover all liabilities and losses to understand, evaluatewhich it may be exposed. Certain insurance coverage may not be available or may be prohibitively expensive in future periods. As the Company’s insurance policies come up for renewal, it may need to assume higher deductibles or pay higher premiums, which could have an adverse impact on its results of operations and when possible, manage and control thesefinancial condition.
Natural disasters, global pandemics, and other business risks.
Trading in our common shares is limited, which mayunpredictable events could adversely affect the timeCompany’s operations.
Natural disasters, outbreaks of epidemics or pandemics, terrorist attacks, extreme weather events or other unpredictable events could adversely affect the Company’s revenues, expenses, and the price at which you can sell your shares of the Company.net income by:
Although our common shares are listed•Decreasing investment valuations in, and returns on, the NASDAQ Global Select Market,investment portfolios that the shares are held byCompany manages and its corporate investments, thus, causing reductions in revenue;
•Causing disruptions in national or global economies that decrease investor confidence and make investment products generally less attractive;
•Reducing the availability of key personnel necessary to conduct the Company’s business activities;
•Interrupting the Company’s business operations or those of critical service providers;
•Triggering technology delays or failures; and/or
•Requiring substantial capital expenditures and operating expenses to restore the Company’s operations.
The Company has developed various backup systems and contingency plans but cannot be assured that those preparations will be adequate in all circumstances that could arise, or that material interruptions and disruptions will not occur. The Company also relies to varying degrees on outside vendors for service delivery in addition to technology and disaster contingency support. There is a relatively small number of shareholders, and trading in our common shares is not active. The spread between the bid and the asked prices is often wide. As a result, you mayrisk that these vendors will not be able to sell your shares on short notice,perform in an adequate and timely manner. If the Company loses the availability of employees, or if it is unable to respond adequately to such an event in a timely manner, revenues, expenses, and net income could be negatively impacted.
Specifically, the effects of the outbreak of the novel coronavirus (COVID-19) in early 2020 negatively affected the global economy, the U.S. economy, and the saleglobal financial markets, and demonstrated that pandemics may disrupt the Company’s operations, which could have an adverse effect on the Company’s business, financial condition, and results of a large number of shares at one time could temporarily depressoperations. Although the market price. In addition, certain shareholders, including certain directors and officerslong-term effects of the Company, ownpandemic cannot be predicted, previous occurrences of other pandemic and epidemic diseases had an adverse effect on the economies of those countries in which they were most prevalent. A recurrence of an outbreak of any kind of epidemic, communicable disease or virus or major public health issue could cause a significant numberslowdown in the levels of shares. The sale of a large number of shares by any such individual could temporarily depresseconomic activity generally, which would adversely affect the market price.Company’s business, financial condition and operations.
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| ITEM 1B. | Unresolved Staff Comments |
None.
The Company is subject to several material risks related to cybersecurity threats. A cybersecurity attack could prevent the Company from managing client portfolios, cause the unauthorized disclosure of sensitive or confidential client or employee information, and/or result in misappropriation of information or funds, which individually or collectively could severely harm its business.
The Company has an Information Security Committee (the “Committee”) to identify, assess, and manage cybersecurity risks and to implement necessary policies and procedures to mitigate those risks. The Committee also coordinates employee education efforts throughout the year. The Managing Director of Information Technology serves as the Committee chair and the day-to-day manager of the Company’s information security management systems. The Committee is comprised of members having expertise in information technology infrastructure, data security, risk management, compliance, and business continuity and recovery efforts. The Committee identifies and assesses risks by understanding and evaluating the Company’s systems, processes, data, and controls. This information is then augmented through participation by certain Committee members in industry threat intelligence groups designed to share best practices and emerging threats related to cybersecurity. The Committee also completes a full cybersecurity risk assessment annually, which drives the implementation of policies and procedures as well as the scope of third-party testing. The Committee has implemented a comprehensive set of cybersecurity policies and procedures that follows standards established by the International Organization for Standardization (“ISO 27001”). Included are policies and procedures to oversee, identify, and mitigate the Company’s cybersecurity risks as well as cybersecurity risks to the Company associated with its significant service providers and vendors. The Company’s cybersecurity policies and procedures have been independently certified by a third-party as compliant with the ISO 27001 standard. The Committee engages multiple third-party experts to perform penetration tests on a periodic basis, and to assess whether these policies and procedures are designed appropriately and operating effectively.
Cybersecurity oversight forms part of the Board’s risk oversight of the Company. The Board oversees efforts by management to manage the cybersecurity risks to which the Company may be exposed. The Board receives at least annual reports and meets periodically with the Chief Compliance Officer and the Managing Director of Information Technology, both of whom serve on the Committee. From its review of these reports and discussions with the Committee and management, the Board ensures it has sufficient awareness of the material cybersecurity risks to which the Company is exposed, enabling a dialogue about how management manages and mitigates those risks. The Board currently has three members who have obtained certifications in cybersecurity oversight.
The Company leases office space and conducts its general operations at one location, inthe address of which is 325 John H. McConnell Boulevard, Suite 200, Columbus, Ohio.
Ohio 43215. The Company does not own any real estate or interests in real estate.
From time to time, the Company is party to ordinary routine litigation that is incidental to its business. There are currently no such matters pending legal proceedings that the Company believes couldwill have a material adverse effect on its consolidated financial statements.
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| ITEM 4. | Mine Safety Disclosures |
Not applicable.
PART II
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| ITEM 5. | Market for Registrant’s Common Equity, Related StockholderShareholder Matters and Issuer Purchases of Equity Securities |
The following performance graph compares the cumulative total shareholder return of an investment in ourDHIL common shares to that of the Russell Microcap®2000 Index and to a peer group index of publicly traded asset management firmsthe Russell 2000 Asset Managers & Custodians Index (the “R2000 A&C Index”) for the five-year period ended on December 31, 2017.2023. The graph assumes that the value of the investment in ourDHIL common shares and each index was $100 on December 31, 2012.2018. Total return includes reinvestment of all dividends. The Russell Microcap®2000 Index makes up less than 3%measures the performance of approximately 2,000 small-cap U.S. equities, and was selected as a broad equity market index comprised of companies with comparable market capitalization to DHIL. The R2000 A&C Index is comprised of the U.S. equity market and is a market-value-weighted indexAsset Managers & Custodians subsector of the smallest 1,000 securitiesRussell 2000 Index, and provides a comparison to companies with comparable market capitalization to DHIL that operate in the small-cap Russell 2000® Index plussame industry as the next 1,000 smallest securities. Peer Group returns are weighted by the market capitalization of each firm at the beginning of the measurement period.Company. The historical information set forth below is not necessarily indicative of future performance. We doThe Company does not make or endorse any predictions as to future stockshare performance.
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| 12/31/2018 | | 12/31/2019 | | 12/31/2020 | | 12/31/2021 | | 12/31/2022 | | 12/31/2023 | Cumulative 5 Year Total Return |
| Diamond Hill Investment Group, Inc. | $100 | | $100 | | $115 | | $167 | | $168 | | $156 | 56 | % |
| Russell 2000 Index | $100 | | $126 | | $151 | | $173 | | $138 | | $161 | 61 | % |
Russell 2000 Asset Managers & Custodians Index(a) | $100 | | $129 | | $173 | | $220 | | $171 | | $235 | 135 | % |
|
| | | | | | | | | | | | | |
| | 12/31/2012 | | 12/31/2013 | | 12/31/2014 | | 12/31/2015 | | 12/31/2016 | | 12/31/2017 | Cumulative 5 Year Total Return |
| Diamond Hill Investment Group, Inc. | $100 | | $179 | | $215 | | $302 | | $345 | | $351 | 251 | % |
| Russell Microcap® Index | $100 | | $146 | | $151 | | $143 | | $172 | | $195 | 95 | % |
| Peer Group* | $100 | | $166 | | $166 | | $126 | | $110 | | $134 | 34 | % |
(a) The R2000 A&C Index used to calculate the returns includes the following companies:
* The Peer Group is based upon all asset managers with market cap of less than $5 billion excluding (i) firms whose primary business is hedge fund or private equity, and (ii) firms with multiple lines of business. The following companies are included in the Peer Group: Alliance Bernstein Holding L.P.; Cohen & Steers, Inc.; Federated Investors, Inc.; GAMCO Investors, Inc.; Hennessy Advisors, Inc.; Legg Mason, Inc.; Manning & Napier, Inc.;
| | | | | | | | |
AlTi Global, Inc.(1) | Cowen Inc. | Patria Investments Ltd.(1) |
| Altisource Portfolio Solutions S.A. | Diamond Hill Investment Group, Inc. | Perella Weinberg Partners |
| Ares Management Corporation | Federated Hermes, Inc. | PJT Partners, Inc. |
| Arlington Asset Investment Corp. | Focus Financial Partners, Inc. | Pzena Investment Management, Inc. |
| Artisan Partners Asset Management, Inc. | GAMCO Investors, Inc. | Sculptor Capital Management, Inc. |
| Ashford Inc. | GCM Grosvenor, Inc. | Silvercrest Asset Management Group Inc. |
| AssetMark Financial Holdings, Inc. | Greenhill & Co., Inc. | StepStone Group, Inc. |
| Associated Capital Group, Inc. | Hamilton Lane Incorporated | Victory Capital Holdings, Inc. |
| Avantax, Inc. | Manning & Napier, Inc. | Virtus Investment Partners, Inc. |
| B. Riley Financial, Inc. | MMA Capital Holdings, Inc. | Waddell & Reed Financial, Inc. |
| BrightSphere Investment Group, Inc. | Morgan Group Holding Co. | Westwood Holdings Group, Inc. |
| Brookfield Business Corp. | Oppenheimer Holdings Inc. | WisdomTree, Inc. |
| Cohen & Steers, Inc. | P10, Inc.(1) | |
(1) Added to the R2000 A&C Index in 2023.
Financial Engines, Inc. and Medley Management, Inc.; Teton Advisors, Inc.; U.S. Global Investors, Inc.; Virtus Investment Partners, Inc.; Waddell & Reed Financial, Inc.; Wisdomtree Investments, Inc.; and Westwood Holdings Group, Inc. were removed from the R2000 A&C Index in 2023.
The Company’sDHIL’s common shares trade on the NASDAQThe Nasdaq Global Select Market under the ticker symbol DHIL. The following table sets forth the high and low salesdaily close prices during each quarter of 20172023 and 2016:2022:
| | | | 2017 | | 2016 |
| | High Price | | Low Price | | Dividend Per Share | | High Price | | Low Price | | Dividend Per Share |
| High
Price | |
| High
Price | |
| High
Price | | | Low
Price | | Quarterly Dividend
Per Share | Special Dividend Per Share | | High
Price | | Low
Price | | Quarterly Dividend
Per Share | Special Dividend Per Share |
| Quarter ended: | | | | | | | | | | | |
| March 31 | |
| March 31 | |
| March 31 | $ | 210.95 |
| | $ | 183.60 |
| | $ | — |
| | $ | 192.91 |
| | $ | 154.21 |
| | $ | — |
|
| June 30 | $ | 207.40 |
| | $ | 188.34 |
| | $ | — |
| | $ | 198.11 |
| | $ | 167.00 |
| | $ | — |
|
| September 30 | $ | 214.66 |
| | $ | 188.71 |
| | $ | — |
| | $ | 198.40 |
| | $ | 179.71 |
| | $ | — |
|
| December 31 | $ | 217.83 |
| | $ | 204.87 |
| | $ | 7.00 |
| | $ | 212.79 |
| | $ | 172.30 |
| | $ | 6.00 |
|
Due to the relatively low trading volume of ourDHIL’s common shares, bid/ask spreads can be wide at times, and therefore, quoted prices may not be indicative of the price a shareholder may receive in an actual transaction. During the years ended December 31, 20172023 and 2016,2022, approximately 2,697,9583,143,990 and 2,360,037, respectively,2,472,866, of ourDHIL’s common shares were traded. The dividends indicated above were special dividends. We have not paidtraded, respectively.
Each fiscal quarter, the Board determines whether to approve and pay a regular quarterly dividend. In addition to the regular quarterly dividends, in the past,fourth quarter of each fiscal year, the Board decides whether to approve and have no present intention of payingpay a special dividend. Although DHIL currently expects to pay regular quarterly dividends, independing on the future. circumstances and the Board’s judgment, DHIL may not pay quarterly or special dividends.
The approximate number of record holders of ourDHIL common shares at December 31, 2017as of February 28, 2024 was 212, although we believe that the71. The approximate number of beneficial ownersholders of ourDHIL common shares is substantially greater.held by brokers, banks, and other intermediaries was greater than 8,000 as of February 28, 2024.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The Company did not purchase any of our common shares through the repurchase program during the year ended December 31, 2017. The following table sets forth information regarding our repurchase programrepurchases of ourDHIL common shares andduring the quarter ended December 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| Period | Total Number of Shares Purchased(a) | | Average Price
Paid Per Share | | Total Number of Shares Purchased as part of Publicly Announced Programs(b) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs(b) |
October 1, 2023 through
October 31, 2023 | 40,329 | | | $ | 155.20 | | | 39,419 | | | $ | 35,235,719 | |
November 1, 2023 through
November 30, 2023 | 47,130 | | | 160.36 | | | 47,130 | | | 27,677,936 | |
December 1, 2023 through
December 31, 2023 | 7,657 | | | $ | 161.61 | | | 7,657 | | | 26,440,462 | |
| Total | 95,116 | | | | | 94,206 | | | $ | 26,440,462 | |
(a)The Company regularly withholds common shares withheld for tax payments due upon the vesting of employee restricted stock unitsshares. During the quarter ended December 31, 2023, the Company withheld 910 DHIL common shares for employee tax withholding obligations at an average price paid per share of $168.57.
(b)On May 10, 2023, the Board approved a repurchase plan, authorizing management to repurchase up to $50.0 million DHIL common shares in the open market and restricted stock awards which vested duringin private transactions in accordance with applicable securities laws (“2023 Repurchase Program”). The 2023 Repurchase Program will expire on May 10, 2025, or upon the fourth quarterearlier completion of fiscal year 2017:all authorized purchases under the program.
|
| | | | | | | | | | | | |
| Period | Total Number
of Shares Purchased(a) | | Average Price
Paid Per Share | | Total Number
of Shares Purchased
as part of Publicly
Announced Plans
or Programs | | Maximum Number
of Shares That May
Yet Be Purchased
Under the Plans or
Programs(b) |
| October 1, 2017 through October 31, 2017 | 1,729 |
| | $ | 212.35 |
| | — |
| | 318,433 |
|
| November 1, 2017 through November 30, 2017 | — |
| | $ | — |
| | — |
| | 318,433 |
|
| December 1, 2017 through December 31, 2017 | 8,777 |
| | $ | 206.10 |
| | — |
| | 318,433 |
|
| Total | 10,506 |
| | $ | 207.13 |
| | — |
| | 318,433 |
|
| |
(a) | All of the 10,506 shares of the Company's common shares purchased during the quarter ended December 31, 2017 represented shares withheld for tax payments due upon the vesting of employee restricted stock units and restricted stock awards which vested during the quarter. |
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(b) | The Company currently has a share repurchase program where the Board of Directors has authorized management to repurchase up to 350,000 of the Company's Common Shares in the open market and in private transactions in accordance with applicable securities laws. Our share repurchase program is not subject to an expiration date. |
We sold no equity securitiesIn connection with the 2023 Repurchase Program, DHIL entered into a Rule 10b5-1 trading arrangement. The Rule 10b5-1 trading arrangement is intended to qualify for the safe harbor under Rule 10b5-1 of the Company during 2017Exchange Act. A Rule 10b5-1 trading arrangement allows a company to purchase its shares at times when it would not ordinarily be in the market because of its trading policies or the possession of material nonpublic information. Because repurchases under a Rule 10b5-1 trading arrangement are subject to specified parameters and certain price, timing, and volume restraints specified in the arrangement, there is no guarantee as to the exact number of common shares that will be repurchased or that there will be any repurchases at all pursuant to the arrangement. Purchases in the open market are intended to comply with Rule 10b-18 under the Exchange Act. As of December 31, 2023, $26.4 million remained available for repurchases under the 2023 Repurchase Program.
Sale of Unregistered Securities
During the quarter ended December 31, 2023, DHIL did not sell any common shares that were not registered under the Securities Act of 1933.Act.
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| |
| ITEM 6. | Selected Financial Data[Reserved] |
The following selected financial data should be read in conjunction with our Consolidated Financial Statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this Annual Report on Form 10-K.
|
| | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| (in thousands, except per share data) | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Income Statement Data: | | | | | | | | | |
| Total revenues | $ | 145,202 |
| | $ | 136,103 |
| | $ | 124,426 |
| | $ | 104,559 |
| | $ | 81,432 |
|
| Compensation and related costs | 54,856 |
| | 52,265 |
| | 47,951 |
| | 43,892 |
| | 40,852 |
|
| Other expenses | 23,345 |
| | 20,769 |
| | 17,755 |
| | 13,207 |
| | 9,898 |
|
| Total expenses | 78,201 |
| | 73,034 |
| | 65,706 |
| | 57,099 |
| | 50,750 |
|
| Net operating income | 67,001 |
| | 63,069 |
| | 58,720 |
| | 47,460 |
| | 30,682 |
|
| Operating profit margin | 46 | % | | 46 | % | | 47 | % | | 45 | % | | 38 | % |
| Net income | 51,602 |
| | 46,594 |
| | 37,074 |
| | 31,581 |
| | 22,155 |
|
| Net income attributable to common shareholders | 49,989 |
| | 46,052 |
| | 37,074 |
| | 31,581 |
| | 22,155 |
|
| Per Share Information: | | | | | | | | | |
| Basic earnings | $ | 14.49 |
| | $ | 13.52 |
| | $ | 11.31 |
| | $ | 9.88 |
| | $ | 7.05 |
|
| Diluted earnings | 14.48 |
| | 13.49 |
| | 11.03 |
| | 9.67 |
| | 6.94 |
|
| Cash dividend declared | 7.00 |
| | 6.00 |
| | 5.00 |
| | 4.00 |
| | 3.00 |
|
| Weighted Average Shares Outstanding | | | | | | | | | |
| Basic | 3,449 |
| | 3,407 |
| | 3,278 |
| | 3,196 |
| | 3,142 |
|
| Diluted | 3,452 |
| | 3,413 |
| | 3,360 |
| | 3,266 |
| | 3,194 |
|
| | At December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Balance Sheet Data (in thousands): | | | | | | | | | |
| Total assets | $ | 250,388 |
| | $ | 199,718 |
| | $ | 145,187 |
| | $ | 107,709 |
| | $ | 75,353 |
|
| Long-term debt | — |
| | — |
| | — |
| | — |
| | — |
|
| Shareholders equity | 172,444 |
| | 139,224 |
| | 105,314 |
| | 74,319 |
| | 44,943 |
|
| Book value per share | $ | 49.69 |
| | $ | 40.81 |
| | $ | 30.84 |
| | $ | 22.40 |
| | $ | 13.80 |
|
| Assets Under Management (in millions) | $ | 22,317 |
| | $ | 19,381 |
| | $ | 16,841 |
| | $ | 15,656 |
| | $ | 12,186 |
|
| Net Client Inflows (Outflows) (in millions) | 425 |
| | 164 |
| | 1,467 |
| | 2,262 |
| | (308 | ) |
| | | | | |
| |
| ITEM 7. | Management��sManagement’s Discussion and Analysis of Financial Condition and Results of Operations |
In this section, we discussItem 7, the Company discusses and analyze theanalyzes its consolidated results of operations for the past three fiscal years and other factors that may affect its future financial performance. This discussion should be read in conjunction with our Consolidated Financial Statements, Notesthe Company’s consolidated financial statements and notes to Consolidated Financial Statements, and Selected Financial Dataconsolidated financial statements contained in this Form 10-K.
Certain statements the Company makes under this Item 7 constitute “forward-looking statements” under the PSLR Act. See “Cautionary Note Regarding Forward-Looking Statements” in Part I, Item 1. You should also consider the Company’s forward-looking statements in light of the risks discussed Part I, Item 1A, as well as our consolidated financial statements, related notes and other financial information appearing elsewhere in this Form 10-K and our other filings with the SEC.
Business Environment1
The performance of the U.S. and international equity markets, as well as the U.S. fixed income market, have a direct impact on the Company’s operations and financial position. A significant portion of the year’s gains in equities came in the final two months. The MSCI All Country World Index advanced 6.75% through the end of October but finished the year with a 22.20% return.Non-U.S. developed markets rose 18% for the year (as measured by the MSCI EAFE Index) and emerging markets were up 10% (as measured by the MSCI EM Index). U.S. stocks outpaced their developed market counterparts, rising 26% (as measured by the Russell 3000 Index).For the year, small-cap stocks were up nearly 17%, mid-cap stocks delivered just over 17%, and large-cap stocks were up a resounding 27% (all returns as measured by the respective Russell indices).Fixed income returns were similarly back-end loaded.The Bloomberg U.S. Corporate Bond Index returned 8.50% in the fourth quarter, compared to the full-year return of 8.52%.The Bloomberg U.S. Aggregate Bond Index finished 2023 with a return of 5.53%, the best calendar year return since 2020 (7.51%).The Bloomberg U.S. Securitized Index ended the year with a 5.08% return, the sector’s best return since 2019 (6.44%).
Despite positive market returns in 2023, combined mutual fund and exchange traded fund (“ETFs”) flows were a modest +$70B. This is up from 2022 which saw $369 billion in outflows but marks the third lowest total flows over the past 20 years. Passively managed funds had inflows of $527 billion while actively managed funds had outflows of $458 billion. Investors favored ETFs over mutual funds as ETFs brought in $580 billion compared to outflows of $510 billion in mutual funds.These flow trends have persisted for a number of years, resulting in 2023 becoming the first year in which total assets in passive products exceeded those of actively managed products.
U.S. equity markets were strong throughout 2017, with all major indices finishing the year at all-time highs. A major themeproducts saw $24 billion in 2017 was the performanceaggregate net outflows.All nine U.S. Equity Morningstar Categories saw active product net outflows, while large value products saw net outflows from both actively managed and passively managed large value funds.This followed meaningful outperformance of growth over value, a gap which continued to widen as the year went on. Investors placed a premium on growth, which propelled the Russell 1000 Growth Index to a significant outperformance compared to(+42.68%) versus the Russell 1000 Value Index. This environment makes it more challenging for long-term intrinsic value managers like DHCM to outperform our respective benchmarks.
Additionally, the ongoing discussion around active versus passive management continued in 2017. We continue to believe that Diamond Hill strategies will outperform their respective passive benchmarks over a full market cycle,Index (up 11.46%) driven by the results of a shared commitment to our intrinsic value-based investment philosophy, long-term perspective, disciplined approach, and alignment with our clients’ interests.
Assessing the impact of macroeconomic factors has been a more important part of estimating the long-term intrinsic valuesmall number of companies with large weightings in recent years; however, it is still just one of many factorsthe growth index.Despite these overall flow trends, actively managed U.S. equity funds with a five-star Morningstar RatingTM had positive flows, a reminder that we consider. As always, bottom-up analysis is of primary importance in estimating the intrinsic value of an individual company, which includes both valuation and business fundamentals.
Low interest rates, high corporate profit margins, and steady economic growth with low inflationinvestors have continued to contributeselect the best performing actively managed investment strategies.
Taxable bond funds in aggregate brought in $223 billion, $161 billion of which was into passively managed ETFs.Flows were led by the intermediate core bond category, which had inflows of $123 billion.Within this category, ETFs share of total assets has increased from 15% to historically high stock valuations. Despite high valuations and extremely low volatility, we see no immediate signs20% from 2019 to 2023.
There were nearly 400 new actively managed ETF products introduced to the market in 2023.While actively managed ETF assets represent only 6% of fundamental excess. Corporate tax reform is likely to boost earnings growthtotal ETF assets, the $118 billion of actively managed ETF inflows represented 20% of total ETF flows.We expect continued ETF product development in the near termindustry including actively managed and fully transparent offerings. Today, ETFs do not allow managers to limit the capacity of their offerings, which limits the applicability of this vehicle for many of the Company’s strategies.
The Company continues to pursue ways to partner with most U.S. companies benefitingclients to deliver its intellectual property, including through model-delivery, separately managed accounts (“SMAs”), and other investment vehicles. Active mutual funds have lost share within intermediary investors asset allocations to SMAs, ETFs, and models. SMAs and model delivery have advantages over ETFs by enabling clients to further personalize portfolios to their unique preferences and tax situations.Other vehicles with non-daily redemptions may see growing demand among investors seeking investment strategies focused on less liquid securities. These strategies and private market investments are a meaningful and increasing share of institutional investors asset allocations and search activity.
1 All net asset and flow data stated in this Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations are sourced from a reduced tax burden. In addition, repatriationMorningstar, Inc. © 2023 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of cash held overseasthis information. Past performance is no guarantee of future results.
Investment Results
It is imperative that the Company generate strong long-term investment results. Strong investment performance is the key driver of long-term success and a more competitive tax regime may leadmeaningfully influences the Company’s ability to increased levels of investmentattract and retain clients.
The strategies offered by the Company have generally tended to fare well compared to their peers in the United States.relevant Morningstar categories. Relative returns versus core benchmarks have been more challenging, as many valuation-sensitive investors have struggled to keep pace with core benchmarks.
Given current valuation levels, we expect positive but below-averageBelow is a summary of the performance of the Funds compared to their respective Morningstar categories and the Company’s investment strategy composite returns compared to their respective benchmarks. Note that a number of the Company's strategies do not yet have a 10-year or 15-year track record. To see more detail, a table is included below these illustrations which provides information on inception date, performance since inception, and the U.S. equity market returns overstrategies' performance relative to the next five years. ProspectiveCore and Value benchmarks.
Source: © 2023 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.
Total number of funds included in the 1-, 3-, 5-, 10-, and 15-year periods are 10, 9, 9, 6, and 5, respectively.Percentage of Fund assets that outperform is based on the Fund assets as of December 31, 2023. Total fund assets for the 1-, 3-, 5-, 10-, and 15-year periods are $15.9B, $15.9B, $15.9B, $12.6B, and $12.5B, respectively, which represents between 45% and 60% of total Company assets for each period.
The percentage of the Company’s composites that outperform their benchmark includes all our composites (excluding Long-Duration Treasury) vs. the primary benchmark for each composite, except for the Long-Short Composite which uses a blended index that is a 60%/40% weighted blend of the Russell 1000 Index and the Bloomberg U.S. Treasury Bills 1-3 Month Index as of December 31, 2023. The percentage of composite assets that outperform is based on total Company composite assets as of December 31, 2023, excluding wrap fee accounts and restricted accounts. Composite net returns are likely to be tempered bycalculated using the combinationhighest applicable standard separate account fee schedule. Total composite assets for the 1-, 3-, 5-, 10-, and 15-year periods are $24.0B, $23.8B, $23.8B, $20.5B, and $19.4B, respectively, which represents between 70% and 88% of above-average price/earnings multiples applied to already very strong levelstotal Company assets for each period. None of corporate profit margins.
Spread levels inthe Company’s composites and composite assets outperformed their benchmarks for both the 10- and 15-year periods.
While the Company’s equity-focused strategies use core benchmarks to evaluate investment gradeperformance over full market cycles, many clients also compare results to value benchmarks. The following is a summary of the investment returns for each of the Company’s strategies as of December 31, 2023, relative to their respective core and high yield credit markets remain compressedvalue indices, as investors continue their search for yield. As such, we believe strong fundamental analysis and a focus on long-term company and collateral performance are the keys to security selection in our fixed income strategies.applicable.
We believe we can achieve better-than-market returns over the next five years through active portfolio management, and our primary focus is always on achieving value-added results for our clients. Our intrinsic value investment philosophy is shared by all | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, 2023 |
| U.S. Equity Composites | Inception | | 1 Year | | 3 Year | | 5 Year | | 10 Year | | Since Inception |
| Diamond Hill Large Cap | 6/30/2001 | | 13.68 | % | | 7.39 | % | | 12.35 | % | | 9.42 | % | | 9.01 | % |
| Russell 1000 Index | | | 26.53 | % | | 8.97 | % | | 15.52 | % | | 11.80 | % | | 8.44 | % |
| Russell 1000 Value Index | | | 11.46 | % | | 8.86 | % | | 10.91 | % | | 8.40 | % | | 7.31 | % |
| Diamond Hill Large Cap Concentrated | 12/31/2011 | | 16.62 | % | | 8.67 | % | | 13.02 | % | | 9.97 | % | | 12.00 | % |
| Russell 1000 Index | | | 26.53 | % | | 8.97 | % | | 15.52 | % | | 11.80 | % | | 13.83 | % |
| Russell 1000 Value Index | | | 11.46 | % | | 8.86 | % | | 10.91 | % | | 8.40 | % | | 10.97 | % |
| Diamond Hill Mid Cap | 12/31/2013 | | 9.88 | % | | 7.86 | % | | 9.20 | % | | 7.12 | % | | 7.12 | % |
| Russell Midcap Index | | | 17.23 | % | | 5.92 | % | | 12.68 | % | | 9.42 | % | | 9.42 | % |
| Russell Midcap Value Index | | | 12.71 | % | | 8.36 | % | | 11.16 | % | | 8.26 | % | | 8.26 | % |
| Diamond Hill Small-Mid Cap | 12/31/2005 | | 11.50 | % | | 8.15 | % | | 10.39 | % | | 7.20 | % | | 8.32 | % |
| Russell 2500 Index | | | 17.42 | % | | 4.24 | % | | 11.67 | % | | 8.36 | % | | 8.64 | % |
| Russell 2500 Value Index | | | 15.98 | % | | 8.81 | % | | 10.79 | % | | 7.42 | % | | 7.69 | % |
| Diamond Hill Small Cap | 12/31/2000 | | 23.35 | % | | 11.86 | % | | 11.23 | % | | 6.43 | % | | 9.90 | % |
| Russell 2000 Index | | | 16.93 | % | | 2.22 | % | | 9.97 | % | | 7.16 | % | | 7.87 | % |
| Russell 2000 Value Index | | | 14.65 | % | | 7.94 | % | | 10.00 | % | | 6.76 | % | | 8.46 | % |
| Diamond Hill Select | 6/30/2000 | | 30.60 | % | | 13.02 | % | | 16.73 | % | | 10.76 | % | | 10.51 | % |
| Russell 3000 Index | | | 25.96 | % | | 8.54 | % | | 15.16 | % | | 11.48 | % | | 7.34 | % |
| Russell 3000 Value Index | | | 11.66 | % | | 8.81 | % | | 10.84 | % | | 8.28 | % | | 7.54 | % |
| | | | | | | | | | | |
| Alternative Composites | | | | | | | | | | | |
| Diamond Hill Long-Short | 6/30/2000 | | 13.25 | % | | 7.92 | % | | 9.39 | % | | 6.50 | % | | 7.32 | % |
| 60% Russell 1000 Index / 40% BofA ML U.S. T-Bill 0-3 Month Index | | | 17.82 | % | | 6.60 | % | | 10.34 | % | | 7.77 | % | | 5.33 | % |
| | | | | | | | | | | |
| International Composites | | | | | | | | | | | |
| Diamond Hill International | 12/31/2016 | | 18.29 | % | | 4.95 | % | | 8.90 | % | | N/A | | 8.78 | % |
| MSCI ACWI ex USA Index | | | 15.62 | % | | 1.55 | % | | 7.08 | % | | N/A | | 6.33 | % |
| | | | | | | | | | | |
| Fixed Income Composites | | | | | | | | | | | |
| Diamond Hill Short Duration Securitized Bond | 7/31/2016 | | 8.98 | % | | 2.70 | % | | 3.23 | % | | N/A | | 3.31 | % |
| Bloomberg Barclays U.S. 1-3 Yr. Gov./Credit Index | | | 4.61 | % | | 0.09 | % | | 1.51 | % | | N/A | | 1.30 | % |
| Diamond Hill Core Bond | 7/31/2016 | | 6.75 | % | | (2.24) | % | | 1.79 | % | | N/A | | 1.67 | % |
| Bloomberg Barclays U.S. Aggregate Index | | | 5.53 | % | | (3.31) | % | | 1.10 | % | | N/A | | 0.78 | % |
_______________________ | | | | | |
| - | Composite returns are net of fees. |
| - | Index returns do not reflect any fees. |
A large majority of our revenue is calculated as a percentage of AUM and is therefore impacted by the overall business and economic environment described above. Financial market declines or deterioration in the economic environment would generally negatively impact the level of our AUM, and consequently our revenue and net income.
Key Financial Performance Indicators
There are a variety of key performance indicators that the Company monitors in order to evaluate ourits business results. The following table presents the results of certain key performance indicators over the past three fiscal years: |
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Ending AUM (in millions) | $ | 22,317 |
| | $ | 19,381 |
| | $ | 16,841 |
|
| Average AUM (in millions) | 20,876 |
| | 17,780 |
| | 16,415 |
|
| Net cash inflows (in millions) | 425 |
| | 164 |
| | 1,467 |
|
| | | | | | |
| Total Revenue (in thousands) | 145,202 |
| | 136,103 |
| | 124,426 |
|
| Total Expenses (in thousands) | 78,201 |
| | 73,034 |
| | 65,706 |
|
Average Advisory Fee Rate, excluding variable rate fees(a) | 0.64 | % | | 0.64 | % | | 0.66 | % |
| Operating Profit Margin | 46 | % | | 46 | % | | 47 | % |
Operating Profit Margin, as adjusted(b) | 48 | % | | 48 | % | | 47 | % |
| | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| Ending AUM and AUA (in millions) | $ | 29,164 | | | $ | 26,565 | | | $ | 33,126 | |
| Average AUM and AUA (in millions) | 27,321 | | | 29,551 | | | 32,045 | |
| Net cash inflows (outflows) (in millions) | (494) | | | (2,241) | | | 2,123 | |
| | | | | |
| Total revenue (in thousands) | 136,716 | | | 154,496 | | | 182,194 | |
| Net operating income | 35,504 | | | 64,331 | | | 76,258 | |
Adjusted net operating income(a) | $ | 41,434 | | | $ | 60,352 | | | $ | 83,680 | |
| Average advisory fee rate | 0.47 | % | | 0.49 | % | | 0.53 | % |
| Average advisory fee rate, excluding performance fees | 0.47 | % | | 0.48 | % | | 0.49 | % |
| Net operating profit margin | 26 | % | | 42 | % | | 42 | % |
Adjusted net operating profit margin(a) | 30 | % | | 39 | % | | 46 | % |
(a) Average advisory fee rates, including variable rate fees, were 0.64%, 0.68%Adjusted net operating income and 0.66% for past three fiscal years respectively.
(b)Operatingadjusted net operating profit margin are non-GAAP financial measures. See the “Non-GAAP Financial Measures and Reconciliation” section in Part II, Item 7 in this Form 10-K for the definitions of “GAAP” and “non-GAAP” as adjusted iswell as a reconciliation of non-GAAP performance measure. See Use of Supplemental Data as Non-GAAP Performance Measure section within this report.financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP.
Assets Under Management
OurThe Company derives revenue is derived primarily from DHCM’s investment advisory and administration fees. Investment advisory and administration fees paid to the CompanyDHCM are generally based on the value of the investment portfolios we manageit manages and fluctuate with changes in the total value of its AUM. The Company, through DHCM, recognizes revenue when DHCM satisfies its performance obligations under the AUM. Substantially allterms of our AUM (95.4%)a contract with a client.
Model Delivery Programs - Assets Under Advisement
DHCM provides strategy-specific model portfolios to sponsors of model delivery programs. DHCM is valuedpaid for its services by the program sponsor at a pre-determined rate based on readily available market quotations. AUM in our fixed income strategies (4.6%) is valued using evaluated prices from independent third-party providers. Fees are recognizedAUA in the period thatmodel delivery programs. DHCM does not have discretionary investment authority over individual client accounts in model delivery programs, and therefore, the Company manages these assets.AUA is not included in the Company’s AUM.
OurThe Company’s revenues are highly dependent on both the value and composition of AUM.AUM and AUA. The following is a summary of ourthe Company’s AUM by product and investment objective, and a roll-forward of the change in AUM, and a summary of AUA for the years ended December 31, 2017, 2016,2023, 2022, and 2015:2021:
| | | | | | | | | | | | | | | | | |
| Assets Under Management and Assets Under Advisement
As of December 31, |
| (in millions) | 2023 | | 2022 | | 2021 |
| Diamond Hill Funds | $ | 15,879 | | | $ | 14,745 | | | $ | 19,786 | |
| Separately managed accounts | 6,617 | | | 6,220 | | | 7,232 | |
| Collective investment trusts | 1,359 | | | 1,040 | | | 603 | |
| Other pooled vehicles | 3,563 | | | 2,758 | | | 3,407 | |
| Total AUM | 27,418 | | | 24,763 | | | 31,028 | |
| Total AUA | 1,746 | | | 1,802 | | | 2,098 | |
| Total AUM and AUA | $ | 29,164 | | | $ | 26,565 | | | $ | 33,126 | |
|
| | | | | | | | | | | |
| | Assets Under Management
As of December 31, |
| (in millions) | 2017 | | 2016 | | 2015 |
| Proprietary funds | $ | 15,974 |
|
| $ | 13,618 |
|
| $ | 11,505 |
|
| Sub-advised funds | 1,518 |
|
| 1,445 |
|
| 665 |
|
| Institutional accounts | 4,825 |
|
| 4,318 |
|
| 4,671 |
|
| Total AUM | $ | 22,317 |
| | $ | 19,381 |
| | $ | 16,841 |
|
| | | | | | | | | | | | | | | | | |
| Assets Under Management
by Investment Strategy
As of December 31, |
| (in millions) | 2023 | | 2022 | | 2021 |
| U.S. Equity | | | | | |
| Large Cap | $ | 17,307 | | | $ | 16,478 | | | $ | 21,285 | |
| Small-Mid Cap | 2,588 | | | 2,646 | | | 3,183 | |
| Mid Cap | 1,023 | | | 899 | | | 1,165 | |
| Select | 593 | | | 392 | | | 438 | |
| Small Cap | 255 | | | 306 | | | 597 | |
| Large Cap Concentrated | 98 | | | 99 | | | 64 | |
| Micro Cap | 21 | | | 15 | | | 16 | |
| Total U.S. Equity | 21,885 | | | 20,835 | | | 26,748 | |
| | | | | |
| Alternatives | | | | | |
| Long-Short | 1,725 | | | 1,752 | | | 1,998 | |
| Total Alternatives | 1,725 | | | 1,752 | | | 1,998 | |
| | | | | |
| International Equity | | | | | |
| International | 109 | | | 52 | | | 56 | |
| Total International Equity | 109 | | | 52 | | | 56 | |
| | | | | |
| Fixed Income | | | | | |
| Short Duration Securitized Bond | 1,948 | | | 1,308 | | | 1,613 | |
| Core Fixed Income | 1,735 | | | 792 | | | 622 | |
| Long Duration Treasury | 26 | | | 33 | | | 51 | |
| Total Fixed Income | 3,709 | | | 2,133 | | | 2,286 | |
| | | | | |
| Total-All Strategies | 27,428 | | | 24,772 | | | 31,088 | |
(Less: Investments in affiliated funds)(a) | (10) | | | (9) | | | (60) | |
| Total AUM | 27,418 | | | 24,763 | | | 31,028 | |
Total AUA(b) | 1,746 | | | 1,802 | | | 2,098 | |
| Total AUM and AUA | $ | 29,164 | | | $ | 26,565 | | | $ | 33,126 | |
|
| | | | | | | | | | | |
| | Assets Under Management
by Investment Strategy
As of December 31, |
| (in millions) | 2017 | | 2016 | | 2015 |
| Small Cap | $ | 1,525 |
| | $ | 1,843 |
| | $ | 1,703 |
|
| Small-Mid Cap | 3,528 |
| | 3,329 |
| | 2,070 |
|
| Mid Cap | 130 |
| | 59 |
| | 18 |
|
| Large Cap | 10,867 |
| | 8,497 |
| | 7,547 |
|
| All Cap Select | 450 |
| | 404 |
| | 545 |
|
| Long-Short | 4,980 |
| | 4,613 |
| | 4,597 |
|
| Corporate bonds | 699 |
| | 581 |
| | 361 |
|
| Core fixed income | 357 |
| | 237 |
| | — |
|
(Less: Investments in affiliated funds) (a) | (219 | ) | | (182 | ) | | — |
|
| Total AUM | $ | 22,317 |
| | $ | 19,381 |
| | $ | 16,841 |
|
(a) Certain Diamond Hillof the Funds own shares of the Diamond Hill Short Duration Total ReturnSecuritized Bond Fund. The Company reduces itsthe total AUM of each Fund that holds such shares by thesethe AUM of the investments held in this affiliated fund. Fund.
(b) AUA is primarily comprised of Large Cap and Select strategies.
| | | | Change in Assets Under Management
For the Year Ended December 31, |
| Change in Assets Under Management
For the Year Ended December 31, | | | Change in Assets Under Management
For the Year Ended December 31, |
| (in millions) | 2017 | | 2016 | | 2015 | (in millions) | 2023 | | 2022 | | 2021 |
| AUM at beginning of the year | $ | 19,381 |
| | $ | 16,841 |
| | $ | 15,656 |
|
| Net cash inflows (outflows) | | | | | |
| proprietary funds | 843 |
| | 548 |
| | 1,916 |
|
| sub-advised funds | (164 | ) | | 639 |
| | (6 | ) |
| institutional accounts | (254 | ) | | (1,023 | ) | | (443 | ) |
| Diamond Hill Funds | |
| Diamond Hill Funds | |
| Diamond Hill Funds | |
| Separately managed accounts | |
| Collective investment trusts | |
| Other pooled vehicles | |
| (494) | |
| Sale of High Yield-Focused Advisory Contracts | |
| Net market appreciation (depreciation) and income | |
| Increase (decrease) during the year | |
| AUM at end of the year | |
| AUA at end of the year | |
| Total AUM and AUA at end of year | |
| | 425 |
| | 164 |
| | 1,467 |
|
| Net market appreciation (depreciation) and income | 2,511 |
| | 2,376 |
| | (282 | ) |
| Increase during the year | 2,936 |
| | 2,540 |
| | 1,185 |
|
| AUM at end of the year | $ | 22,317 |
| | $ | 19,381 |
| | $ | 16,841 |
|
| Average AUM during the year | |
| Average AUM during the year | |
| Average AUM during the year | |
| Average AUA during the year | |
| Total Average AUM and AUA during the year | |
| | | | | | | | | | | | | | | | | |
| Net Cash Inflows (Outflows) Further Breakdown
For the Year Ended December 31, |
| (in millions) | 2023 | | 2022 | | 2021 |
| Net cash inflows (outflows) | | | | | |
| Equity | $ | (1,865) | | | $ | (2,247) | | | $ | 958 | |
| Fixed Income | 1,371 | | | 6 | | | 1,165 | |
| $ | (494) | | | $ | (2,241) | | | $ | 2,123 | |
2023 Discussion of Net Cash Outflows
Flows out of the Company’s equity strategies were largely driven by flows out of its Large Cap strategy, which experienced net outflows of $1.4 billion. Net outflows from the Company’s other equity strategies totaled approximately $0.5 billion. Outflows from the equity strategies were partially offset by fixed income net inflows of $1.4 billion into the Company’s fixed income strategies.
2022 Discussion of Net Cash Outflows
Flows out of the Company’s equity strategies were largely driven by flows out of its Large Cap strategy, which experienced net outflows of $1.9 billion. The Large Cap strategy was soft closed during 2022. The strategy was fully reopened on February 28, 2023. Net outflows from the Company’s other equity strategies totaled approximately $0.3 billion. The Company’s fixed income strategies saw mixed results with net flows of $0.3 billion into its Core Bond strategy offsetting outflows from its Short Duration Securitized Bond Fund of $0.2 billion. The Company also saw growth in its CIT offerings. In addition to new clients, some larger plans moved from the Funds into the CITs.
2021 Discussion of Net Cash Inflows
Both the Company’s equity and fixed income strategies experienced net inflows during 2021. Flows in the Company’s equity strategies were largely driven by its Large Cap strategy, which experienced net inflows of $2.1 billion. These net inflows were partially offset by net outflows from the Company’s other equity strategies totaling approximately $1.2 billion. The Company’s fixed income strategies, including the High Yield-Focused Advisory Contracts prior to their sale, had net positive flows of $1.2 billion during 2021.
Consolidated Results of Operations
The following is a table and discussion of ourthe Company’s consolidated results of operations.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands, except per share amounts and percentages) | 2023 | | 2022 | | % Change | | 2022 | | 2021 | | % Change |
| Total revenue | $ | 136,716 | | | $ | 154,496 | | | (12)% | | $ | 154,496 | | | $ | 182,194 | | | (15)% |
| Net operating income | 35,504 | | | 64,331 | | | (45)% | | 64,331 | | | 76,258 | | | (16)% |
Adjusted net operating income (a) | 41,434 | | | 60,352 | | | (31)% | | 60,352 | | | 83,680 | | | (28)% |
| Investment income (loss), net | 23,071 | | | (20,187) | | | NM | | (20,187) | | | 16,381 | | | NM |
| Gain on sale of High Yield-Focused Advisory Contracts | — | | | 6,814 | | | (100)% | | 6,814 | | | 9,000 | | | (24)% |
| Income tax expense | 15,490 | | | 14,088 | | | 10% | | 14,088 | | | 26,050 | | | (46)% |
| Net income attributable to common shareholders | 42,226 | | | 40,434 | | | 4% | | 40,434 | | | 74,201 | | | (46)% |
| Earnings per share attributable to common shareholders (diluted) | $ | 14.32 | | | $ | 13.01 | | | 10% | | $ | 13.01 | | | $ | 23.34 | | | (44)% |
Adjusted earnings per share attributable to common shareholders (diluted)(a) | $ | 10.28 | | | $ | 14.40 | | | (29)% | | $ | 14.40 | | | $ | 19.48 | | | (26)% |
| Net operating profit margin | 26 | % | | 42 | % | | NM | | 42 | % | | 42 | % | | NM |
Adjusted net operating profit margin (a) | 30 | % | | 39 | % | | NM | | 39 | % | | 46 | % | | NM |
|
| | | | | | | | | | | | | | | | | | | |
| (in thousands, except per share amounts and percentages) | 2017 |
| 2016 |
| % Change |
| 2016 |
| 2015 |
| % Change |
| Total revenue | $ | 145,202 |
| | $ | 136,103 |
| | 7% | | $ | 136,103 |
| | $ | 124,426 |
| | 9% |
| Net operating income | $ | 67,001 |
| | $ | 63,069 |
|
| 6% |
| $ | 63,069 |
| | $ | 58,720 |
|
| 7% |
| Net income attributable to common shareholders | $ | 49,989 |
| | $ | 46,052 |
|
| 9% |
| $ | 46,052 |
| | $ | 37,074 |
|
| 24% |
| Earnings per share attributable to common shareholders (Diluted) | $ | 14.48 |
| | $ | 13.49 |
|
| 7% |
| $ | 13.49 |
| | $ | 11.03 |
|
| 22% |
| Operating profit margin | 46 | % | | 46 | % |
| NM |
| 46 | % | | 47 | % |
| NM |
Operating profit margin, as adjusted(a) | 48 | % | | 48 | % | | NM | | 48 | % | | 47 | % | | NM |
(a) OperatingAdjusted net operating income, adjusted earnings per share attributable to common shareholders (diluted), and adjusted net operating profit margin as adjusted is aare non-GAAP performance measure.financial measures. See Use of Supplemental Data as Non-GAAP Performance Measurethe “Non-GAAP Financial Measures and Reconciliation” section within this report.Form 10-K for the definition of “non-GAAP” and a reconciliation of the non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP.
Year Ended December 31, 2017Summary Discussion of Consolidated Results of Operations - 2023 Compared to 2022
Revenue for 2023 decreased $17.8 million compared with Year Ended December 31, 2016to 2022, primarily due to a 7.5% decrease in total average AUM and AUA, as well as a decrease in the average advisory fee rate (excluding performance-based fees) from 0.48% in 2022 to 0.47% in 2023. Refer to the “Revenue” section below in Part II, Item 7 of this Form 10-K for further details on the decrease in the average advisory fee rate. The Company recognized $1.2 million of performance-based fees during 2023 compared to $1.5 million of performance-based fees during 2022.
Net operating profit margin was 26% for 2023 and 42% for 2022. Adjusted net operating profit margin was 30% for 2023 and 39% for 2022. The decrease in net operating profit margin is primarily due to a 12% decrease in revenues while compensation and related costs (excluding deferred compensation) increased approximately $0.2 million (less than 1%) period-over-period. In addition, the investment gains on the Company’s deferred compensation investments increased deferred compensation expense during the current period, decreasing the current period operating margin by 4%. Adjusted net operating profit margin excludes 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 (the “Consolidated Fund(s)”). Refer to Note 2 to the consolidated financial statements for a detailed description of the funds that are consolidated in each year. Refer to the “Non-GAAP Financial Measures and Reconciliation” section below in Part II, Item 7 of this Form 10-K for further details on adjusted net operating profit margin.
The Company expects that its operating margin will fluctuate from period to period based on various factors, including revenues, investment results in the strategies the Company manages, employee performance, staffing levels, and gains and losses on investments held in the Diamond Hill Fixed Term Deferred Compensation Plan and the Diamond Hill Variable Term Deferred Compensation Plan (together, the “Deferred Compensation Plans”).
The Company had $23.1 million in investment income due to market appreciation in 2023, compared to $20.2 million in investment loss due to market declines in 2022.
The Company recorded a gain of $6.8 million from the final payment on the sale of its High Yield-Focused Advisory Contracts during 2022.
Income tax expense increased $1.4 million for 2023, compared to 2022. The increase in income tax expense was primarily due to an increase in the Company’s income before taxes, which was partially offset by a decrease in its effective tax rate from 27.6% to 26.4% year-over-year. The decrease in the Company’s effective tax rate in 2023 was primarily due to the benefit attributable to redeemable noncontrolling interests.
The Company generated net income attributable to common shareholders of $50.0$42.2 million ($14.4814.32 per diluted share) for the year ended December 31, 2017,2023, compared withto $40.4 million ($13.01 per diluted share) for 2022. The year-over-year increase in net income attributable to common shareholders was primarily due to investment income in 2023 compared to investment loss in 2022 due to the market environment. The increase in investment income in 2023 was partially offset by a decline of $46.1revenues as a result of decreased average AUM and AUA, while the investment losses in 2022 were partially offset by the recognition during 2022 of a $6.8 million ($13.49 per diluted share)gain from the final payment on the sale of the High Yield-Focused Advisory Contracts.
Summary Discussion of Consolidated Results of Operations - 2022 Compared to 2021
Revenue for the year ended December 31, 2016. Revenue increased $9.12022 decreased $27.7 million period over periodcompared to 2021, primarily due to a 17% increase9% decrease in average AUM year over year, partially offset by $6.4and $1.5 million in performanceperformance-based fees recognizedearned in 2022 compared to $11.9 million of performance-based fees in 2021. A significant performance-based agreement reached its first five-year measurement term on September 30, 2021. Since the initial five-year measurement period ended, the performance-based fee has been calculated annually based on the early terminationclient investment results over the recently completed five-year period. The average advisory fee rate (excluding performance-based fees) remained unchanged at 0.52% year-over-year.
Net operating profit margin was 42% for both 2022 and 2021 respectively. Adjusted net operating profit margin was 39% for 2022 and 46% for 2021. Adjusted net operating profit margin excludes the impact of a variable rate fee contract in 2016 compared to $0.2 million in 2017. Operating expenses year-over-year increased $5.2 million, primarily related to increases inmarket movements on the deferred compensation liability and related expenseseconomic hedges, and generalthe impact of the Diamond Hill International Fund and administrative expenses.the Diamond Hill Large Cap Concentrated Fund (together, the “Consolidated Funds”). See the “Non-GAAP Financial Measures and Reconciliation” section below in Part II, Item 7 of this Form 10-K.
The Company recorded non-operating income of $14.0 million in 2017 due to market appreciation and dividend income from our investment portfolio compared to non-operating income of $10.2 million in 2016 due to $7.5 million in market appreciation and dividend income from our investment portfolio and a $2.7 million gain on the sale of Beacon Hill.
Income tax expense increased $2.7 million from 2016 to 2017 due to the overall increase in income before taxes. The Tax Cuts and Jobs Act was passed on December 22, 2017. Among other federal tax law changes, for taxable years beginning after December 31, 2017, the new law establishes a flat corporate income tax rate of 21% to replace our current rate of 35% and eliminates the corporate alternative minimum tax. In accordance with ASC 740, the Company has recorded tax expense of $3.6 million resulting from the re-measurement of the Company's net deferred tax assets as of December 31, 2017. This additional tax expense in the current year was partially offset by $2.4 million of excess tax benefits on restricted stock units and restricted stock awards and $0.4 million of tax benefits on dividends paid on restricted stock awards. The Company currently expects its full year 2018 effective income tax rate to range between 23 and 25 percent.
Operating profit margin was 46% for both 2017 and 2016. Operating profit margin, as adjusted, was 48% for both 2017 and 2016. See Use of Supplemental Data as Non-GAAP Performance Measure section within this report. We expect that ourits operating margin will fluctuate sometimes substantially, from yearperiod to yearperiod based on various factors, including revenues;revenues, investment results;results in the strategies the Company manages, employee performance;performance, staffing levels; developmentlevels, and gains and losses on investments held in the Deferred Compensation Plans.
The Company had $20.2 million in investment losses due to market declines for 2022 compared to $16.4 million in investment income due to market appreciation for 2021.
The Company recorded a gain of investment strategies, products, or channels;$6.8 million from the final payment on the sale of its High Yield-Focused Advisory Contracts during 2022, and industry comparisons.a gain of $9.0 million from the initial payment on the sale of its High Yield-Focused Advisory Contracts during 2021.
Year Ended December 31, 2016Income tax expense decreased $12.0 million for 2022, compared with Year Ended December 31, 2015to 2021. The decrease in income tax expense was primarily due to a decrease in the Company’s income before taxes, which was partially offset by an increase in its effective tax rate from 25.6% to 27.6% year-over-year. The increase in the Company’s effective tax rate in 2022 was primarily due to the benefit attributable to redeemable noncontrolling interests.
The Company generated net income attributable to common shareholders of $46.1$40.4 million ($13.4913.01 per diluted share) for the year ended December 31, 2016,2022, compared withto $74.2 million ($23.34 per diluted share) for 2021. The year-over-year decrease in net income attributable to common shareholders of $37.1 million ($11.03 per diluted share) for the year ended December 31, 2015. Revenue increased $11.7 million period over periodwas primarily due to an 8% increasethe decline of revenues as a result of decreased AUM, the decrease in average AUM year over year, as well as $6.4 million in variable rateperformance-based fees, earned upon the termination of a variable fee agreement in 2016 versus no variable rate fees realized in 2015. The revenue increase was partially offset by an increase in operating expenses of $7.3 million, primarily related to increases in compensation and related expenses, general and administrative expenses, and mutual fund administration expenses. The Company had $7.5 million in investment income due to market appreciation in 2016 compared to investment losses of $0.7 million in 2015. In addition, the Company recognized a $2.7 million gain on the sale of Beacon Hill during 2016. Income tax expense increased $5.8 million from 2015 to 20162022 due to the overall increase in income before taxes.market environment.
Operating profit margin decreased to 46% for 2016 from 47% for 2015. Operating profit margin, as adjusted, increased to 48% for 2016 from 47% for 2015. See Use of Supplemental Data as Non-GAAP Performance Measure section within this report. We expect that our operating margin will fluctuate, sometimes substantially, from year to year based on various factors, including revenues; investment results; employee performance; staffing levels; development of investment strategies, products, or channels; and industry comparisons.
Revenue | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands, except percentages) | 2023 | | 2022 | | % Change | | 2022 | | 2021 | | % Change |
| Investment advisory | $ | 129,180 | | | $ | 144,326 | | | (10)% | | $ | 144,326 | | | $ | 170,138 | | | (15)% |
| Mutual fund administration, net | 7,536 | | | 10,170 | | | (26)% | | 10,170 | | | 12,056 | | | (16)% |
| Total | $ | 136,716 | | | $ | 154,496 | | | (12)% | | $ | 154,496 | | | $ | 182,194 | | | (15)% |
Revenue
|
| | | | | | | | | | | | | | | | | | | |
| (in thousands) | 2017 | | 2016 | | % Change | | 2016 | | 2015 | | % Change |
| Investment advisory | $ | 132,689 |
| | $ | 121,645 |
| | 9% | | $ | 121,645 |
| | $ | 107,916 |
| | 13% |
| Mutual fund administration, net | 12,513 |
| | 14,458 |
| | (13)% | | 14,458 |
| | 16,510 |
| | (12)% |
| Total | 145,202 |
| | 136,103 |
| | 7% | | 136,103 |
| | 124,426 |
| | 9% |
Revenue - 2023 Compared to 2022 Revenue for the Year Ended December 31, 2017 compared with Year Ended December 31, 2016
As a percent of total annual revenues for 2017 and 2016, investment advisory fees accounted for 91% and 89%, respectively, and mutual fund administration fees made up the remaining 9% and 11%, respectively.
Investment Advisory Fees.Investment advisory fees increaseddecreased by $11.0$15.1 million, or 9%10%, from the year ended December 31, 20162022 to the year ended December 31, 2017.2023. Investment advisory fees are calculated as a percentage of the market value of client accounts at contractual fee rates, which vary by investment product. The increasedecrease in investment advisory fees was driven by an increase of 17%primarily due to a decrease in total average AUM year-over-year, partially offset by $6.4 millionand AUA of 7.5% and a decrease in performance fees recognized on the early termination of a variableaverage advisory fee rate fee contracts in 2016 compared(excluding performance-based fees) from 0.48% to $0.2 million in 2017.0.47% period over period. The average advisory fee rate excluding variable(excluding performance-based fees) for equity assets decreased from 0.50% in 2022 to 0.49% in 2023, and the average advisory fee rate for fixed income assets decreased from 0.31% in 2022 to 0.30% in 2023. The decrease in the total average advisory fee rate was due to the growth in fixed income assets, which increased from 8% of total average AUM and AUA in 2022, to 11% in 2023. The average advisory fee rate is calculated by dividing investment advisory revenues by total average AUM and AUA during the period. Also, the Company recognized $1.2 million of performance-based fees in both 2017 and 2016 was 0.64%.during 2023, compared to $1.5 million of performance-based fees during 2022.
Mutual Fund Administration Fees. Mutual fund administration fees decreased $1.9$2.6 million, or 13%26%, from the year ended December 31, 20162022 compared to the year ended December 31, 2017.2023. Mutual fund administration fees include administration fees received from the Funds, which are calculated as a percentage of the Funds’ average Funds' AUM. Mutual fund administration fees for the year ended December 31, 2016 included Beacon Hill administration fees of $2.5 million, which were absent in 2017. Absent Beacon Hill revenue, mutual fund administration fees relatedThis decrease was primarily due to the Funds increased $0.6 million period over period. This increase is primarily driven byimpact of a 20% increase in average Funds' AUM from the year ended December 31, 2016 to the year ended December 31, 2017, partially offset by a decrease of two basis points in the net administration fee rate from 0.10% for the year ended December 31, 2016 to 0.08% for the year ended December 31, 2017. Effective June 1, 2017, the Company reduced the administration fee rate charged on all Fund assets by one basis point. The13% decrease in the netFunds’ average AUM from 2022 compared to 2023, and an increase in administration fee rate was due to the following fee reductions that occurred during the periods indicated:
|
| | | |
| | Class A & C | Class I | Class Y |
| 1/1/2016 - 7/31/2016 | 0.24% | 0.20% | 0.10% |
| 8/1/2016 - 12/31/2016 | 0.24% | 0.19% | 0.09% |
| 1/1/2017 - 5/31/2017 | 0.24% | 0.19% | 0.09% |
| 6/1/2017 - 12/31/2017 | 0.23% | 0.18% | 0.08% |
Effective February 28, 2018, the Company will reduce the administration fee rate across all share classesfees paid on behalf of the Funds. The following table summarizes the scheduled changes:Funds as a percentage of average Fund AUM.
|
| | | | |
| | Fee Rate | AUM as of December 31, 2017 (in millions) |
| Class A and C | 0.21% | $ | 2,797 |
|
| Class I | 0.17% | 10,443 |
|
| Class Y | 0.05% | 2,825 |
|
Revenue for the Year Ended December 31, 2016 compared with Year Ended December 31, 2015- 2022 Compared to 2021
As a percent of total annual revenues for 2016 and 2015, investment advisory fees accounted for 89% and 87%, respectively, and mutual fund administration fees made up the remaining 11% and 13%, respectively.
Investment Advisory Fees. Investment advisory fees increaseddecreased by $13.7$25.8 million, or 13%15%, from the year ended December 31, 20152021 to the year ended December 31, 2016.2022. Investment advisory fees are calculated as a percentage of the market value of client accounts at contractual fee rates, thatwhich vary by investment product.
The increaseCompany recognized $1.5 million of performance-based fees in 2022 compared to $11.9 million of performance-based fees recognized in 2021. A significant performance-based agreement reached the end of its first five-year measurement period on September 30, 2021. Since the initial five-year measurement period ended, the performance-based fee has been calculated annually based on the client investment results over the recently completed five-year period.
The remaining decrease in investment advisory fees was driven by an increasedue to a decrease of 8%9% in average AUM year over year and an increase of two basis points in the average advisory fee rate.year. The average advisory fee rate in 2016(excluding performance-based fees) was 0.52% for both 2022 and 2015 was 0.68% and 0.66%, respectively. The average advisory fee rate for 2016 included variable rate fees of $6.4 million earned upon the termination of a variable fee agreement during the fourth quarter. No variable rate fees were realized in 2015. The average advisory fee rate excluding variable rate fees in 2016 and 2015 was 0.64% and 0.66%, respectively. This decrease of two basis points in the advisory fee rate excluding variable rate fees from 2015 to 2016 was primarily due to a 0.05% reduction in the Large Cap Fund advisory fee effective January 1, 2016 and the closing of certain strategies with higher average fees to new investors. Effective April 30, 2016, the Diamond Hill Small-Mid Cap strategy was closed to new investors.2021.
Mutual Fund Administration Fees. Mutual fund administration fees decreased by $2.1$1.9 million, or 12%16%, from the year ended December 31, 20152021 compared to the year ended December 31, 2016.2022. Mutual fund administration fees include administration fees received from the Funds, which are calculated as a percentage of the Funds’ average Funds' AUM, and all Beacon Hill fee revenue. TheAUM. This decrease in the mutual fund administration fee was primarily due to the sale of Beacon Hill effective July 31, 2016, resulting in five less months of Beacon Hill revenue recognized during 2016.
In addition, while the net mutual fund administration fee rate decreased two basis points from 0.12% for the year ended 2015 to 0.10% for the year ended 2016, the impact of this fee rate decrease was offset by a 15% increase in average Funds' AUM from $10.7 billion for the year ended 2015 to $12.3 billion for the year ended 2016. The14% decrease in the net administration fee rate was dueFunds’ average AUM from 2021 compared to fee reductions that occurred during the period.2022.
Expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands, except percentages) | 2023 | | 2022 | | % Change | | 2022 | | 2021 | | % Change |
| Compensation and related costs, excluding deferred compensation expense (benefit) | $ | 70,731 | | | $ | 70,505 | | | —% | | $ | 70,505 | | | $ | 73,591 | | | (4)% |
| Deferred compensation expense (benefit) | 5,600 | | | (4,402) | | | NM | | (4,402) | | | 7,082 | | | NM |
| General and administrative | 14,935 | | | 13,607 | | | 10% | | 13,607 | | | 14,021 | | | (3)% |
| Sales and marketing | 6,684 | | | 7,160 | | | (7)% | | 7,160 | | | 7,659 | | | (7)% |
| Mutual fund administration | 3,262 | | | 3,295 | | | (1)% | | 3,295 | | | 3,582 | | | (8)% |
| Total | $ | 101,212 | | | $ | 90,165 | | | 12% | | $ | 90,165 | | | $ | 105,935 | | | (15)% |
Expenses - 2023 Compared to 2022
|
| | | | | | | | | | | | | | | | | | | |
| (in thousands) | 2017 | | 2016 | | % Change | | 2016 | | 2015 | | % Change |
| Compensation and related costs | $ | 54,856 |
| | $ | 52,265 |
| | 5% | | $ | 52,265 |
| | $ | 47,951 |
| | 9% |
| General and administrative | 14,037 |
| | 12,622 |
| | 11% | | 12,622 |
| | 10,246 |
| | 23% |
| Sales and marketing | 4,994 |
| | 4,263 |
| | 17% | | 4,263 |
| | 4,179 |
| | 2% |
| Mutual fund administration | 4,313 |
| | 3,884 |
| | 11% | | 3,884 |
| | 3,330 |
| | 17% |
| Total | 78,200 |
| | 73,034 |
| | 7% | | 73,034 |
| | 65,706 |
| | 11% |
Expenses for the Year Ended December 31, 2017 compared with Year Ended December 31, 2016
Compensation and Related Costs.Costs, Excluding Deferred Compensation Expense (Benefit). Employee compensation and benefitsrelated costs (excluding deferred compensation benefit) increased by $2.6$0.2 million or 5%, from the year ended December 31, 2016 to the year ended December 31, 2017,in 2023. This increase is primarily due to an increase in salary and related benefits of $2.8$1.3 million, in incentive compensation during fiscal year 2017, an increase of $0.5 million in deferred compensation expense and an increase of $0.3 million in restricted stock expense. These increases wereexpense of $1.0 million, partially offset by a decrease in incentive compensation of $1.0 million$2.4 million. On average, the Company had 129 employees in salaries2023 and related benefits due to the sale2022.
Incentive compensation expense can fluctuate significantly period over period as we evaluate incentive compensation by reviewingthe Company evaluates investment performance, individual performance, Companyits own performance, and other factors.
Deferred Compensation Expense (Benefit). Deferred compensation expense was $5.6 million for 2023 compared to a benefit of $4.4 million for 2022, primarily due to market appreciation on the Deferred Compensation Plans’ investments in 2023 compared to market declines in 2022.
The gain (loss) on the Deferred Compensation Plans’ investments increases (decreases) deferred compensation expense (benefit) and is included in operating income. Deferred compensation expense (benefit) is offset by an equal amount in investment income (loss) below net operating income on the consolidated statements of income, and thus, has no impact on net income attributable to the Company.
General and Administrative.Administrative. General and administrative expenses increased by $1.4$1.3 million, or 11%10%, from the year ended December 31, 20162022 compared to the year ended December 31, 2017.2023. This increase iswas primarily due to an increase in IT consulting expenseinvestment research-related expenses of $0.7$0.6 million, primarily to enhance our enterprise data management and customer relationship management software, an increase in investment researchconsulting expenses of $0.5$0.4 million, and an increase in depreciation expenserecruiting expenses of $0.2$0.3 million.
Sales and Marketing.Marketing.Sales and marketing expenses increaseddecreased by $0.7$0.5 million, or 17%7%, from the year ended December 31, 20162022 compared to the year ended December 31, 2017. This increase2023. The decrease was primarily due to additionala reduction in payments made to third party intermediaries related toas a result of the sale of our proprietary funds. Fordecrease in the years ended December 31, 2017 and 2016, approximately 65% and 63% of sales and marketing expense is related to revenue sharing payments made to third party intermediaries.Funds’ average AUM period over period.
Mutual Fund Administration.Administration. Mutual fund administration expenses increaseddecreased by $0.4less than $0.1 million, or 11%1%, from the year ended December 31, 20162022 compared to the year ended December 31, 2017.2023. Mutual fund administration expenses consist of both variable and fixed expenses. The variable expenses are based on Fund AUM levels and the number of shareholder accounts. The increasedecrease was primarily due to a reduction in variable expenses as a result of the 20% increasedecrease in the Funds’ average Funds' AUM from the year ended 2016 to the year ended 2017.period over period.
Expenses for the Year Ended December 31, 2016 compared with Year Ended December 31, 2015- 2022 Compared to 2021
Compensation and Related Costs.Costs, Excluding Deferred Compensation Expense (Benefit). Employee compensation and benefits increaseddecreased by $4.3$3.1 million, or 9%4%, from the year ended December 31, 20152021 compared to the year ended December 31, 2016,2022. This decrease is due to a decrease in accrued incentive compensation of $6.2 million and a decrease in other compensation expense of $0.7 million, which was partially offset by an increase in restricted stock expense of $1.7$3.3 million related to restricted stock grants issued in salariesFebruary of 2022 under the Company’s long-term incentive program, and an increase in salary and related benefits due to an increase in staffing and merit increases and an increase of $0.5 millionmillion. On average, the Company had 129 employees in incentive compensation during fiscal year 2016.2022 and 126 in 2021. Incentive compensation expense can fluctuate significantly period over period as we evaluate incentive compensation by reviewingthe Company evaluates investment performance, individual performance, Companyits own performance, and other factors. In addition,
Deferred Compensation Expense (Benefit). Deferred compensation benefit was $4.4 million for 2022 compared to an expense of $7.1 million for 2021.
The gain (loss) on the Company recognized unrealized gains on deferred compensationDeferred Compensation Plans’ investments which increasedincreases (decreases) deferred compensation expense by $1.8 million(benefit) and is included in 2016 compared to unrealized losses on deferred compensation investments, which decreased deferredoperating income. Deferred compensation expense (benefit) is offset by $0.2 millionan equal amount in 2015.investment income (loss) below net operating income on the consolidated statements of income, and thus, has no impact on net income attributable to the Company.
General and Administrative.Administrative. General and administrative expenses increasedfor 2022 decreased by $2.4$0.4 million, or 23%3%, from the year ended December 31, 2015compared to the year ended December 31, 2016.2021. This increasedecrease was primarily due to a $1.4decrease of $0.7 million increase in charitable donations, a $0.4consulting fees and $0.5 million increase in research expenses to support our investment team, a $0.4 million increase in legal and other costsof proxy solicitation fees related to the sale of Beacon Hill, increased information technology expense ofthe High Yield-Focused Advisory Contracts in 2021. That decrease was partially offset by a $0.5 million increase in investment research and related conference fees, a $0.1 million increase in insurance expense, and $0.1a $0.2 million of additional depreciation expense year over year.increase in IT staffing, hardware, and software expenses.
Sales and Marketing.Sales and marketing expenses increasedfor 2022 decreased by $0.1$0.5 million, or 2%7%, from the year ended December 31, 2015compared to the year ended December 31, 2016. This increase2021. The decrease was primarily due to additionaldecreases of $0.9 million in payments made to third partythird-party intermediaries related to the sale of our proprietary funds.the Funds on their platforms, and $0.2 million related to its distribution technology platform and related external data costs. The decrease was partially offset by an increase of $0.6 million in sales-related travel expenses.
Mutual Fund Administration. Mutual fund administration expenses increasedfor 2022 decreased by $0.6$0.3 million, or 17%8%, from the year ended December 31, 2015compared to the year ended December 31, 2016.2021. Mutual fund administration expenses consist of both variable and fixed expenses. The variable expenses are based on Fund AUM levels and the number of shareholder accounts. The increasedecrease was consistent withdue to a reduction in variable expenses as a result of the 15% increasedecrease in the Funds’ average Funds' AUM from the year ended 2015 to the year ended 2016.period-over-period.
Liquidity and Capital Resources
Sources of Liquidity
OurThe Company’s current financial condition is highly liquid, with a significant amount of ourits assets comprised of cash and cash equivalents, investments, accounts receivable, and accounts receivable.other current assets. The Company'sCompany’s main source of liquidity is cash flows from operating activities, which are generated from investment advisory and mutual fund administration fees. Our investment portfolio is invested in readily marketable
securities, which provide for cash liquidity, if needed. Inflation is expected to have no material impact on our financial position. Cash and cash equivalents, investments held directly by DHCM, accounts receivable, and investmentsother current assets represented approximately 94%$181.8 million and 92%$182.9 million of total assets as of December 31, 20172023, and 20162022, respectively. We believeThe Company believes that these sources of liquidity, as well as ourits continuing cash flows from operating activities, will be sufficient to meet ourits current and future operating needs for at least the next 12 months.
Uses of Liquidity
In line with the Company’s primary objective to fulfill our fiduciary duty to clients and secondary objective to achieve an adequate long-term return for shareholders, we anticipate ourThe Company anticipates that its main uses of cash will be for operating expenses and seed capital to fund new and existing investment strategies.
The Board of Directors and management regularly review various factors to determine whether we havethe Company has capital in excess of that required for theits business and what are the appropriate useuses of any such excess capital.capital, including share repurchases and/or the payment of dividends.
Share Repurchases
On May 10, 2023, the Board approved the 2023 Repurchase Program. The factors considered include our investment opportunities, capital needed2023 Repurchase Program authorizes management to repurchase up to $50.0 million of DHIL’s common shares in the open market and in private transactions in accordance with applicable securities laws. The 2023 Repurchase Program will expire on May 10, 2025, or upon the earlier completion of all authorized purchases under the program. As of December 31, 2023, $26.4 million remained available for investment strategies, risks, and future dividend and capital gain tax rates. Evaluating management’s stewardship of capital for shareholders is a central part of our investment discipline that we practice for our clients. We hold ourselvesrepurchases under the 2023 Repurchase Program. Prior to the same standard.approval of the 2023 Repurchase Program, the Company repurchased shares under similar prior repurchase programs.
While 2017The authority to repurchase shares may be exercised from time to time as market conditions warrant and is subject to regulatory constraints. The timing, amount, and other terms and conditions of any repurchases will be determined by management in its discretion based on a variety of factors, including the market price of such shares, corporate considerations, general market and economic conditions, and applicable legal requirements.
The following table summarizes the Company’s annual share repurchase transactions:
| | | | | | | | | | | | | | | | | |
| Year | Total Number
of Shares
Purchased | | Average Price
Paid Per Share Purchased | | Purchase Price of Shares
Purchased |
| 2023 | 212,638 | | | $ | 162.81 | | | $ | 34,619,944 | |
| 2022 | 217,009 | | | 178.45 | | | 38,726,007 | |
| 2021 | 45,727 | | | 171.02 | | | 7,820,315 | |
| Total | 475,374 | | | $ | 157.65 | | | $ | 81,166,266 | |
Dividends
Fiscal 2023 was the tenth16th consecutive year that the Company has paid a dividend.
A summary of cash dividends paid during the years ended December 31, 2023, 2022, and 2021 is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year | | Regular Dividend Per Share | | Regular Dividend Total | | Special Dividend Per Share | | Special Dividend Total | | Total Dividend Per Share | | Total Dividends |
| 2023 | | $ | 6.00 | | | $ | 17,676,364 | | | $ | — | | | $ | — | | | $ | 6.00 | | | $ | 17,676,364 | |
| 2022 | | $ | 6.00 | | | 18,637,238 | | | $ | 4.00 | | | 12,059,669 | | | $ | 10.00 | | | 30,696,907 | |
| 2021 | | $ | 4.00 | | | 12,700,876 | | | $ | 19.00 | | | 60,260,100 | | | $ | 23.00 | | | 72,960,976 | |
| Total | | | | $ | 49,014,478 | | | | | $ | 72,319,769 | | | | | $ | 121,334,247 | |
On February 28, 2024, the Board approved a regular quarterly dividend for the first quarter of 2024 of $1.50 per share to be paid on March 22, 2024, to shareholders of record as of March 11, 2024. This dividend is expected to reduce shareholders’ equity by approximately $4.3 million. Subject to Board approval and compliance with applicable law, the Company expects to pay a regular quarterly dividend of $1.50 per share in 2024.
In addition to the regular quarterly dividends, the Board will decide whether to approve and pay an additional special dividend in the fourth quarter of each fiscal year. After assessing the current market environment, the level of share repurchases during the year, as well as the regular dividend paid during 2023, the Company decided not to issue a special dividend there can be no assurance that we willin 2023. Although the Company currently expects to continue to pay a dividend inregular quarterly dividends, depending on the future. We have paid outcircumstances and the Board’s judgment, the Company may not pay quarterly or special dividends totaling $71.00 per share from 2008 through 2017. These special dividends reduced shareholders’ equity by $211.9 million over the past ten years. The 2017, 2016, and 2015 special dividends reduced shareholders' equity by $24.3 million, $20.5 million, and $17.0 million, respectively.as described.
Working Capital
As of December 31, 2017,2023, the Company had working capital of approximately $162.5$146.1 million, compared to $126.0$144.9 million atas of December 31, 2016.2022. Working capital includes cash securities owned by common shareholders, prepaid expenses and cash equivalents, accounts receivable, investments (excluding those held in the Company’s Deferred Compensation Plans), and other current receivables,assets of DHCM, net of liabilities. On October 26, 2017, our Board of Directors declared a $7.00 per share dividendaccounts payable on December 11, 2017 to shareholders of record on December 1, 2017. The payment of the special cash dividend reduced our working capital balance by approximately $24.3 million. and accrued expenses, accrued incentive compensation, and other current DHCM liabilities.
The Company hashad no debt and we believe ourthe Company believes its available working capital is sufficient to cover current expenses and presently anticipated capital expenditures.
Below is a summary of securities owned by the Companyinvestments as of December 31, 20172023 and 2016.2022:
| | | | | | | | | | | | | | |
| As of December 31, | | | |
| 2023 | | 2022 | | | |
| Corporate Investments: | | | | | | |
| Diamond Hill International Fund | $ | 52,763,714 | | | $ | 36,084,204 | | | | |
| Diamond Hill Core Bond Fund | 34,003,006 | | | 41,315,982 | | | | |
| Diamond Hill Micro Cap Fund, LP | 12,482,396 | | | 9,690,916 | | | | |
| Diamond Hill Large Cap Concentrated Fund | 12,402,576 | | | 10,571,463 | | | | |
| Total Corporate Investments | 111,651,692 | | | 97,662,565 | | | | |
| Deferred Compensation Plan Investments in the Funds | 36,087,170 | | | 30,744,990 | | | | |
| Total investments held by DHCM | 147,738,862 | | | 128,407,555 | | | | |
| Redeemable noncontrolling interest in the Consolidated Fund | — | | | 17,268,156 | | | | |
| Total investments | $ | 147,738,862 | | | $ | 145,675,711 | | | | |
|
| | | | | | | |
| | As of December 31, |
| | 2017 | | 2016 |
| Corporate Investments: | | | |
| Diamond Hill Core Bond Fund | $ | 30,529,852 |
| | $ | 29,293,308 |
|
| Diamond Hill Mid Cap Fund | 19,270,451 |
| | 17,754,640 |
|
| Diamond Hill Research Opportunities Fund | 15,409,571 |
| | 10,921,540 |
|
| Diamond Hill High Yield Fund | 14,200,885 |
| | 6,210,304 |
|
| Diamond Hill Valuation-Weighted 500 ETF | 12,096,719 |
| | 13,329,549 |
|
| Diamond Hill Global Fund, L.P. | 2,055,196 |
| | 1,570,965 |
|
| Diamond Hill International Equity Fund, L.P. | 1,173,870 |
| | — |
|
| Diamond Hill Short Duration Total Return Fund | — |
| | 20,245 |
|
| Total Corporate Investments | 94,736,544 |
| | 79,100,551 |
|
| Deferred Compensation Plan Investments in the Funds | 20,480,790 |
| | 14,182,470 |
|
| Total investments held by DHCM | 115,217,334 |
| | 93,283,021 |
|
| Redeemable noncontrolling interest in Consolidated Funds | 23,258,688 |
| | 14,732,614 |
|
| Total Investment Portfolio | $ | 138,476,022 |
| | $ | 108,015,635 |
|
Cash Flow Analysis
Cash Flows from Operating Activities
The Company’s cash flows from operating activities are calculated by adjusting net income to reflect other significant operating sources and uses of cash, certain significant non-cash items such(such as share-based compensation,compensation), and timing differences in the cash settlement of operating assets and liabilities. The Company expects that cash flows provided by operating activities will continue to serve as its primary source of working capital in the near future.
For the year ended December 31, 2017,In 2023, net cash provided by operating activities totaled $60.9$34.7 million. The changes in net cashCash provided by operating activities werewas primarily driven by net income of $51.6$43.1 million the addas well as non-cash adjustments added back to net income consisting of share-based compensation of $8.6$11.7 million and depreciation of $0.9 million, and the effect of non-cash items and timing differences in the cash settlement of assets and liabilities of $5.4$1.3 million. These cash inflows were partially offset by the net change in trading securities held in our Consolidated Funds underlying investment portfolios of $5.5 million. Absent the operating cash flows ofby the Consolidated Funds of $10.9 million and the cash flow from operations would have been approximately $64.3 million (see "Supplemental Consolidated Cash Flow Statement" below). We expect thatimpact of timing differences in the settlement of other assets and liabilities of $10.5 million. Net cash flows provided by operating activities will continue to serve as our primary source of working capital$34.7 million was inclusive of $9.8 million of cash used in operations by the near future.Consolidated Funds.
For the year ended December 31, 2016,In 2022, net cash provided by operating activities totaled $20.1$39.5 million. The changes in net cashCash provided by operating activities werewas primarily driven by net income of $46.6$36.9 million, and the add backbacks of net losses on investments of $24.5 million, share-based compensation of $8.2$10.7 million, and depreciationmarket declines of $0.7 million and the effect of noncash items and timing differences in the cash settlement of assets and liabilities of $6.2$1.4 million. These cash inflows were significantlypartially offset by the net change in trading securities held in our Consolidated Funds underlying investment portfolios of $41.7 million. Absent the operating cash flows ofby the Consolidated Funds of $14.0 million, the cash flow fromimpact of timing differences in the settlement of other assets and liabilities of $13.2 million, and the adjustment to net income of $6.8 million for the gain on sale of the High Yield-
Focused Advisory Contracts. Net cash provided by operating activities of $39.5 million was inclusive of $9.5 million of cash used in operations would have been approximately $60.7 million.by the Consolidated Funds.
For the year ended December 31, 2015,
In 2021, net cash provided by operating activities totaled $52.0$26.3 million. The changes in net cashCash provided by operating activities werewas primarily driven by net income of $37.1$75.6 million, the add back of share-based compensation of $8.6$7.4 million, and depreciation of $0.6$1.3 million, and the effectcash impact of noncash items and timing differences in the cash settlement of assets and liabilities of $5.8$12.3 million.
These cash inflows were partially offset by net securities purchased by the Consolidated Funds of $50.4 million, net gains on investments of $10.9 million, and the adjustment to net income of $9.0 million for the gain on sale of the High Yield-Focused Advisory Contracts. Net cash provided by operating activities of $26.3 million was inclusive of $50.3 million of cash used in operations by the Consolidated Funds.
Cash Flows from Investing Activities
The Company’s cash flows from investing activities consist primarily of capital expenditures and purchases and redemptions in our
its investment portfolio, capital expenditures and proceeds from the sale of Beacon Hill.portfolio.
Cash flows used in investing activities totaled $18.6$4.2 million for the year ended December 31, 2017. The Company purchased corporate investments of $21.0 million, inclusive of $3.9 million of corporate investments into our deferred compensation plans, and made $1.1 million of property and equipment purchases during the period. These cash outflows were partially offset by redemptions of corporate investments of $2.6 million and $1.0 million of proceeds from the scheduled collection of the promissory note received from the sale of Beacon Hill.
in 2023. Cash flows used in investing activities totaled $5.7 million for the year ended December 31, 2016. The Company purchased corporate investmentswere driven by purchases of $26.0 million, inclusive of $4.4 million of corporate investments into our deferred compensation plans. This cash outflow was partially offset by redemptions of corporateCompany-sponsored investments of $19.5 million, and netpartially offset by proceeds received of $1.2 million from the sale of Beacon Hill. The Company also purchased $0.5 million of property and equipment.Company-sponsored investments totaling $15.3 million.
Cash flows used inprovided by investing activities totaled $11.9$6.0 million in 2022. The cash provided was due to proceeds from the sale of Company-sponsored investments totaling $6.9 million and $6.8 million of proceeds received from the final payment for the year ended December 31, 2015. The Company purchased $22.1 millionsale of corporate investments, inclusive of $4.3 million of purchases into our deferred compensation plans, during 2015. This cash outflow wasthe High Yield-Focused Advisory Contracts. These proceeds were partially offset by redemptionspurchases of corporateCompany-sponsored investments of $11.8 million. The Company also purchased $1.6$7.6 million ofand property and equipment relatedpurchases of $0.1 million.
Cash flows provided by investing activities totaled $27.3 million in 2021. The cash provided was due to our office space expansion.proceeds from the sale of Company-sponsored investments totaling $40.8 million and $9.0 million of proceeds received from the sale of the High Yield-Focused Advisory Contracts. These proceeds were partially offset by purchases of Company-sponsored investments of $21.4 million and property and equipment purchases (primarily capitalized software) of $1.1 million.
Cash Flows from Financing Activities
The Company’s cash flows from financing activities consist primarily of the paymentrepurchase of specialDHIL common shares, dividends paid on DHIL common shares, DHIL common shares withheld related to employee tax withholding proceeds received under the Diamond Hill Investment Group, Inc. Employee Stock Purchase Plan (“ESPP”), and distributions to, or contributions from, redeemable noncontrolling interest holders.
For the year ended December 31, 2017,In 2023, net cash used byin financing activities totaled $23.0$46.7 million, consisting of repurchases of DHIL’s common shares of $34.6 million, the payment of dividends of $17.7 million, and the value of shares withheld to cover employee tax withholding obligations of $5.2 million. These cash outflows were partially offset by net subscriptions received in the Consolidated Funds from redeemable non-controlling interest holders of $10.4 million and proceeds received under the ESPP of $0.4 million.
In 2022, net cash used in financing activities totaled $62.9 million, consisting of repurchases of DHIL’s common shares of $38.7 million, the payment of dividends of $30.7 million, and the value of shares withheld to cover employee tax withholding obligations of $3.4 million. These cash outflows were partially offset by net subscriptions received in the Consolidated Funds from redeemable non-controlling interest holders of $9.5 million and proceeds received under the ESPP of $0.5 million.
In 2021, net cash used in financing activities totaled $71.5 million, consisting of the payment of special dividends of $24.3$73.0 million, repurchases of DHIL’s common shares of $7.8 million, and the value$1.6 million of shares withheld related to employee tax withholding of $5.0 million,obligations. These cash outflows were partially offset by net subscriptions received in the Consolidated Funds from redeemable noncontrollingnon-controlling interest holders of $6.3$10.3 million and proceeds received under the ESPP of $0.6 million.
For the year ended December 31, 2016, net cash used by financing activities totaled $14.6 million, consisting
For the year ended December 31, 2015, net cash used by financing activities totaled $18.5 million, consisting of the payment of special dividends of $17.0 million and the value of shares withheld related to employee tax withholding of $4.3 million, partially offset by excess income tax benefit from share-based compensation of $2.5 million and the income tax benefit from dividends paid on restricted stock of $0.4 million.
Supplemental Consolidated Cash Flow Statement
On January 1, 2016, the Company implemented the new consolidation accounting guidance that resulted in the consolidation of the Company's exchange traded fund ("ETF") and the Diamond Hill Core Bond Fund, one of our individual mutual funds (collectively the "Consolidated Funds") in which we have controlling interests. Our consolidated balance sheet now reflects the investments and other assets and liabilities of the Consolidated Funds, as well as redeemable noncontrolling interests for the portion of the Consolidated Funds that are held by third party investors. Although we can redeem our net interest in the Consolidated Funds at any time, we cannot directly access or sell the assets held by the Consolidated Funds to obtain cash for general operations. Additionally, the assets of the Consolidated Funds are not available to general creditors.
The following table summarizes the condensed cash flows for the year ended December 31, 2017,2023, 2022, and 2021 that are attributable to Diamond Hill Investment Group, Inc.the Company and to the Consolidated Funds, and the related eliminations required in preparing the consolidated financial statements.
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2023 |
| Cash flow attributable to Diamond Hill Investment Group, Inc. | | Cash flow attributable to Consolidated Funds | | Eliminations | | As reported on the Consolidated Statement of Cash Flows |
| Cash flows from operating activities: | | | | | | | |
| Net income (loss) | $ | 42,226,422 | | | $ | 3,818,572 | | | $ | (2,959,446) | | | $ | 43,085,548 | |
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | |
| Depreciation | 1,289,315 | | | — | | | — | | | 1,289,315 | |
| Share-based compensation | 11,691,890 | | | — | | | — | | | 11,691,890 | |
| Net (gains) losses on investments | (15,677,551) | | | (3,818,572) | | | 2,959,446 | | | (16,536,677) | |
| Net change in securities held by Consolidated Funds | — | | | (10,930,911) | | | — | | | (10,930,911) | |
| Other changes in assets and liabilities | 4,959,742 | | | 1,110,217 | | | — | | | 6,069,959 | |
| Net cash provided by (used in) operating activities | 44,489,818 | | | (9,820,694) | | | — | | | 34,669,124 | |
| Net cash used in investing activities | (3,675,461) | | | — | | | (530,163) | | | (4,205,624) | |
| Net cash provided by (used in) financing activities | (57,017,780) | | | $ | 9,820,694 | | | $ | 530,163 | | | (46,666,923) | |
| Net change during the year | (16,203,423) | | | — | | | — | | | (16,203,423) | |
| Cash and cash equivalents at beginning of year | 63,195,302 | | | — | | | — | | | 63,195,302 | |
| Cash and cash equivalents at end of year | $ | 46,991,879 | | | — | | | — | | | $ | 46,991,879 | |
| | | | Year Ended December 31, 2017 |
| | Cash flow attributable to Diamond Hill Investment Group, Inc. | | Cash flow attributable to Consolidated Funds | | Eliminations | | As reported on the Consolidated Statement of Cash Flows |
| Year Ended December 31, 2022 | | | Year Ended December 31, 2022 |
| Cash flow attributable to Diamond Hill Investment Group, Inc. | | | Cash flow attributable to Diamond Hill Investment Group, Inc. | | Cash flow attributable to Consolidated Funds | | Eliminations | | As reported on the Consolidated Statement of Cash Flows |
| Cash flows from Operating Activities: | | | | | | | |
| Net Income | $ | 49,988,957 |
| | $ | 5,665,511 |
| | $ | (4,052,799 | ) | | $ | 51,601,669 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
|
| Net income (loss) | |
| Net income (loss) | |
| Net income (loss) | |
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | |
| Depreciation | |
| Depreciation | |
| Depreciation | 888,197 |
| | — |
| | — |
| | 888,197 |
|
| Share-based compensation | 8,582,069 |
| | — |
| | — |
| | 8,582,069 |
|
| Net (gains)/losses on investments | (8,118,039 | ) | | (5,665,511 | ) | | 4,052,799 |
| | (9,730,751 | ) |
| Net change in trading securities held by Consolidated Funds | — |
| | (5,511,669 | ) | | — |
| | (5,511,669 | ) |
| Gain on sale of High Yield-Focused Advisory Contracts | |
| Net (gains) losses on investments | |
| Net change in securities held by Consolidated Funds | |
| Other changes in assets and liabilities | 12,912,965 |
| | 2,177,279 |
| | — |
| | 15,090,244 |
|
| Net cash provided by (used in) operating activities | 64,254,149 |
| | (3,334,390 | ) | | — |
| | 60,919,759 |
|
| Net cash used in investing activities | (15,485,455 | ) | | — |
| | (3,068,364 | ) | | (18,553,819 | ) |
| Net cash provided by investing activities | |
| Net cash provided by (used in) financing activities | (29,243,784 | ) | | 3,221,712 |
| | 3,068,364 |
| | (22,953,708 | ) |
| Net change during the period | 19,524,910 |
| | (112,678 | ) | | — |
| | 19,412,232 |
|
| Net change during the year | |
| Cash and cash equivalents at beginning of year | 57,077,198 |
| | 112,678 |
| | — |
| | 57,189,876 |
|
| Cash and cash equivalents at end of year | $ | 76,602,108 |
| | $ | — |
| | $ | — |
| | $ | 76,602,108 |
|
We have audited the accompanying consolidated balance sheets of Diamond Hill Investment Group, Inc. and subsidiaries (the “Company”)Company) as of December 31, 20172023 and 2016,2022, the related consolidated statements of income, shareholders’ equity and redeemable noncontrolling interest, and cash flows for each of the years in the three‑yearthree-year period ended December 31, 2017,2023, and the related notes (collectively, the “consolidatedconsolidated financial statements”)statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172023 and 2016,2022, and the results of its operations and its cash flows for each of the years in the three‑yearthree-year period ended December 31, 2017,2023, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB), the Company’s internal control over financial reporting as of December 31, 2017,2023, based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, (COSO), and our report dated February 22, 201829, 2024 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
To the Shareholders and Board of Directors
Diamond Hill Investment Group, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Diamond Hill Investment Group, Inc.’s and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, the related consolidated statements of income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes (collectively, the consolidated financial statements), and our report dated February 22, 2018 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A of the Company’s December 31, 2017 annual report on Form 10-K. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Columbus, Ohio
February 22, 2018
Diamond Hill Investment Group, Inc.
Consolidated Balance Sheets
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| ASSETS | | | |
| Cash and cash equivalents | $ | 76,602,108 |
| | $ | 57,189,876 |
|
| Investment portfolio | 138,476,022 |
| | 108,015,635 |
|
| Accounts receivable | 19,220,279 |
| | 18,605,209 |
|
| Prepaid expenses | 2,073,343 |
| | 2,032,726 |
|
| Income taxes receivable | 4,114,962 |
| | 1,111,890 |
|
| Property and equipment, net of depreciation | 4,057,901 |
| | 4,025,758 |
|
| Deferred taxes | 5,843,704 |
| | 8,736,767 |
|
| Total assets | $ | 250,388,319 |
| | $ | 199,717,861 |
|
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
| Liabilities | | | |
| Accounts payable and accrued expenses | $ | 11,890,403 |
| | $ | 9,787,048 |
|
| Accrued incentive compensation | 25,496,500 |
| | 22,683,500 |
|
| Deferred compensation | 20,480,790 |
| | 14,182,470 |
|
| Total liabilities | 57,867,693 |
| | 46,653,018 |
|
| Redeemable noncontrolling interest | 20,076,806 |
| | 13,840,688 |
|
| Permanent Shareholders’ Equity | | | |
Common stock, no par value
7,000,000 shares authorized; 3,470,428 issued and outstanding at December 31, 2017 (inclusive of 191,900 unvested shares); 3,411,556 issued and outstanding at December 31, 2016 (inclusive of 201,800 unvested shares) | 118,209,111 |
| | 109,293,803 |
|
| Preferred stock, undesignated, 1,000,000 shares authorized and unissued | — |
| | — |
|
| Deferred equity compensation | (19,134,963 | ) | | (17,728,106 | ) |
| Retained Earnings | 73,369,672 |
| | 47,658,458 |
|
| Total permanent shareholders’ equity | 172,443,820 |
| | 139,224,155 |
|
| Total liabilities and shareholders’ equity | $ | 250,388,319 |
| | $ | 199,717,861 |
|
| | | | |
| Book value per share | $ | 49.69 |
| | $ | 40.81 |
|
| | | | | | | | | | | |
| | December 31, |
| | 2023 | | 2022 |
| ASSETS | | | |
| Cash and cash equivalents | $ | 46,991,879 | | | $ | 63,195,302 | |
| Investments | 147,738,862 | | | 145,675,711 | |
| Accounts receivable | 18,051,241 | | | 17,329,034 | |
| Prepaid expenses | 3,509,460 | | | 3,435,269 | |
| Income taxes receivable | 1,620,864 | | | 1,463,547 | |
| Property and equipment, net of depreciation | 2,591,604 | | | 4,348,341 | |
| Deferred taxes | 11,590,438 | | | 14,374,206 | |
| Total assets | $ | 232,094,348 | | | $ | 249,821,410 | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
| Liabilities | | | |
| Accounts payable and accrued expenses | $ | 6,190,370 | | | $ | 9,177,977 | |
| Accrued incentive compensation | 29,500,000 | | | 32,100,000 | |
| Deferred compensation | 36,087,170 | | | 30,744,990 | |
| | | |
| Total liabilities | 71,777,540 | | | 72,022,967 | |
| Redeemable noncontrolling interest | — | | | 14,126,198 | |
| Permanent Shareholders’ Equity | | | |
| Common shares, no par value: 7,000,000 shares authorized; 2,823,076 issued and outstanding at December 31, 2023 (inclusive of 190,172 unvested shares); 3,010,457 issued and outstanding at December 31, 2022 (inclusive of 219,459 unvested shares) | 22,164,410 | | | 51,688,631 | |
| Preferred stock, undesignated, 1,000,000 shares authorized and unissued | — | | | — | |
| Deferred equity compensation | (15,392,418) | | | (17,011,144) | |
| Retained earnings | 153,544,816 | | | 128,994,758 | |
| Total permanent shareholders’ equity | 160,316,808 | | | 163,672,245 | |
| Total liabilities and shareholders’ equity | $ | 232,094,348 | | | $ | 249,821,410 | |
The accompanying notes are an integral part of these consolidated financial statements.
Diamond Hill Investment Group, Inc.
Consolidated Statements of Income
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| REVENUES: | | | | | |
| Investment advisory | $ | 132,688,462 |
| | $ | 121,645,149 |
| | $ | 107,915,557 |
|
| Mutual fund administration, net | 12,513,267 |
| | 14,457,926 |
| | 16,510,429 |
|
| Total revenue | 145,201,729 |
| | 136,103,075 |
| | 124,425,986 |
|
| OPERATING EXPENSES: | | | | | |
| Compensation and related costs | 54,855,972 |
| | 52,264,843 |
| | 47,951,039 |
|
| General and administrative | 14,036,681 |
| | 12,621,831 |
| | 10,245,866 |
|
| Sales and marketing | 4,994,525 |
| | 4,263,143 |
| | 4,179,064 |
|
| Mutual fund administration | 4,313,185 |
| | 3,884,655 |
| | 3,330,265 |
|
| Total operating expenses | 78,200,363 |
| | 73,034,472 |
| | 65,706,234 |
|
| NET OPERATING INCOME | 67,001,366 |
| | 63,068,603 |
| | 58,719,752 |
|
| Investment income (loss), net | 14,017,593 |
| | 7,517,398 |
| | (736,590 | ) |
| Gain on sale of subsidiary | — |
| | 2,675,766 |
| | — |
|
| INCOME BEFORE TAXES | 81,018,959 |
| | 73,261,767 |
| | 57,983,162 |
|
| Income tax expense | (29,417,290 | ) | | (26,667,635 | ) | | (20,908,665 | ) |
| NET INCOME | 51,601,669 |
| | 46,594,132 |
| | 37,074,497 |
|
| Less: Net income attributable to redeemable noncontrolling interest | (1,612,712 | ) | | (542,209 | ) | | — |
|
| NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ | 49,988,957 |
| | $ | 46,051,923 |
| | $ | 37,074,497 |
|
| Earnings per share attributable to common shareholders | | | | | |
| Basic | $ | 14.49 |
| | $ | 13.52 |
| | $ | 11.31 |
|
| Diluted | $ | 14.48 |
| | $ | 13.49 |
| | $ | 11.03 |
|
| Weighted average shares outstanding | | | | | |
| Basic | 3,448,824 |
| | 3,407,408 |
| | 3,277,920 |
|
| Diluted | 3,451,838 |
| | 3,413,391 |
| | 3,359,786 |
|
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| REVENUES: | | | | | |
| Investment advisory | $ | 129,179,500 | | | $ | 144,325,517 | | | $ | 170,137,609 | |
| Mutual fund administration, net | 7,536,871 | | | 10,170,502 | | | 12,056,228 | |
| Total revenue | 136,716,371 | | | 154,496,019 | | | 182,193,837 | |
| OPERATING EXPENSES: | | | | | |
| Compensation and related costs, excluding deferred compensation expense (benefit) | 70,730,640 | | | 70,505,216 | | | 73,591,327 | |
| Deferred compensation expense (benefit) | 5,599,880 | | | (4,402,265) | | | 7,082,153 | |
| General and administrative | 14,935,033 | | | 13,606,922 | | | 14,020,836 | |
| Sales and marketing | 6,684,410 | | | 7,159,686 | | | 7,659,423 | |
| Mutual fund administration | 3,262,421 | | | 3,294,983 | | | 3,581,960 | |
| Total operating expenses | 101,212,384 | | | 90,164,542 | | | 105,935,699 | |
| NET OPERATING INCOME | 35,503,987 | | | 64,331,477 | | | 76,258,138 | |
| NON-OPERATING INCOME (LOSS) | | | | | |
| Investment income (loss), net | 23,071,441 | | | (20,186,511) | | | 16,381,216 | |
| Gain on sale of High Yield-Focused Advisory Contracts | — | | | 6,813,579 | | | 9,000,000 | |
| Total non-operating income (loss) | 23,071,441 | | | (13,372,932) | | | 25,381,216 | |
| NET INCOME BEFORE TAXES | 58,575,428 | | | 50,958,545 | | | 101,639,354 | |
| Income tax expense | (15,489,880) | | | (14,087,783) | | | (26,049,815) | |
| NET INCOME | 43,085,548 | | | 36,870,762 | | | 75,589,539 | |
| Net loss (income) attributable to redeemable noncontrolling interest | (859,126) | | | 3,563,345 | | | (1,388,930) | |
| NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ | 42,226,422 | | | $ | 40,434,107 | | | $ | 74,200,609 | |
| Earnings per share attributable to common shareholders | | | | | |
| Basic | $ | 14.32 | | | $ | 13.01 | | | $ | 23.34 | |
| Diluted | $ | 14.32 | | | $ | 13.01 | | | $ | 23.34 | |
| Weighted average shares outstanding | | | | | |
| Basic | 2,948,625 | | | 3,107,604 | | | 3,179,497 | |
| Diluted | 2,948,625 | | | 3,107,604 | | | 3,179,497 | |
The accompanying notes are an integral part of these consolidated financial statements.
Diamond Hill Investment Group, Inc.
Consolidated Statements of Shareholders’ Equity and Redeemable Noncontrolling Interest | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares
Outstanding | | Common Shares | | Deferred Equity
Compensation | | Retained
Earnings | | Total | | Redeemable Noncontrolling Interest |
| Balance at December 31, 2020 | 3,168,823 | | | $ | 80,810,946 | | | $ | (14,748,118) | | | $ | 118,017,925 | | | $ | 184,080,753 | | | $ | 9,372,333 | |
| Issuance of restricted stock grants | 69,879 | | | 11,105,508 | | | (11,105,508) | | | — | | | — | | | — | |
| Amortization of restricted stock grants | — | | | — | | | 7,182,299 | | | — | | | 7,182,299 | | | — | |
| Common shares issued as incentive compensation | 3,681 | | | 529,806 | | | — | | | — | | | 529,806 | | | — | |
| Issuance of common shares related to 401(k) plan match | 506 | | | 87,667 | | | — | | | — | | | 87,667 | | | — | |
| Issuance of common shares related to employee stock purchase plan | 4,278 | | | 748,472 | | | — | | | — | | | 748,472 | | | — | |
| Shares withheld related to employee tax withholding obligations | (10,057) | | | (1,625,413) | | | — | | | — | | | (1,625,413) | | | — | |
| Forfeiture of restricted stock grants | (19,847) | | | (3,402,622) | | | 3,402,622 | | | — | | | — | | | — | |
| Repurchases of common shares | (45,727) | | | (7,820,315) | | | — | | | — | | | (7,820,315) | | | — | |
| Cash dividends paid of $23.00 per share | — | | | — | | | — | | | (72,960,976) | | | (72,960,976) | | | — | |
| Net income | — | | | — | | | — | | | 74,200,609 | | | 74,200,609 | | | 1,388,930 | |
| Net subscriptions of consolidated funds | — | | | — | | | — | | | — | | | — | | | 10,298,891 | |
| Net deconsolidations of Company sponsored investments | — | | | — | | | — | | | — | | | — | | | (3,303,818) | |
| Balance at December 31, 2021 | 3,171,536 | | | $ | 80,434,049 | | | $ | (15,268,705) | | | $ | 119,257,558 | | | $ | 184,422,902 | | | $ | 17,756,336 | |
| Issuance of restricted stock grants | 76,143 | | | 13,436,439 | | | (13,436,439) | | | — | | | — | | | — | |
| Amortization of restricted stock grants | — | | | — | | | 10,530,486 | | | — | | | 10,530,486 | | | — | |
| Common shares issued as incentive compensation | 2,743 | | | 487,870 | | | — | | | — | | | 487,870 | | | — | |
| Issuance of common shares related to 401(k) plan match | 211 | | | 37,313 | | | — | | | — | | | 37,313 | | | — | |
| Issuance of common shares related to employee stock purchase plan | 3,392 | | | 619,159 | | | — | | | — | | | 619,159 | | | — | |
| Shares withheld related to employee tax withholding obligations | (19,302) | | | (3,436,678) | | | — | | | — | | | (3,436,678) | | | — | |
| Forfeiture of restricted stock grants | (7,257) | | | (1,163,514) | | | 1,163,514 | | | — | | | — | | | — | |
| Repurchases of common shares | (217,009) | | | (38,726,007) | | | — | | | — | | | (38,726,007) | | | — | |
| Cash dividends paid of $10.00 per share | — | | | — | | | — | | | (30,696,907) | | | (30,696,907) | | | — | |
| Net income (loss) | — | | | — | | | — | | | 40,434,107 | | | 40,434,107 | | | (3,563,345) | |
| Net deconsolidations of Company sponsored investments | — | | | — | | | — | | | — | | | — | | | (9,528,503) | |
| Net subscriptions of consolidated funds | — | | | — | | | — | | | — | | | — | | | 9,461,710 | |
| Balance at December 31, 2022 | 3,010,457 | | | $ | 51,688,631 | | | $ | (17,011,144) | | | $ | 128,994,758 | | | $ | 163,672,245 | | | $ | 14,126,198 | |
| Issuance of restricted stock grants | 59,578 | | | 11,131,853 | | | (11,131,853) | | | — | | | — | | | — | |
| Amortization of restricted stock grants | — | | | — | | | 11,603,239 | | | — | | | 11,603,239 | | | — | |
| Issuance of common shares related to 401(k) plan match | 99 | | | 16,344 | | | — | | | — | | | 16,344 | | | — | |
| Issuance of common shares related to employee stock purchase plan | 2,904 | | | 482,097 | | | — | | | — | | | 482,097 | | | — | |
| Shares withheld related to employee tax withholding obligations | (30,204) | | | (5,131,262) | | | — | | | — | | | (5,131,262) | | | — | |
| Forfeiture of restricted stock grants | (7,120) | | | (1,147,340) | | | 1,147,340 | | | — | | | — | | | — | |
| Repurchases of common shares (inclusive of accrued excise tax of $255,969) | (212,638) | | | (34,875,913) | | | — | | | — | | | (34,875,913) | | | — | |
| Cash dividends paid of $6.00 per share | — | | | — | | | — | | | (17,676,364) | | | (17,676,364) | | | — | |
| Net income | — | | | — | | | — | | | 42,226,422 | | | 42,226,422 | | | 859,126 | |
| Net deconsolidations of Company sponsored investments | — | | | — | | | — | | | — | | | — | | | (25,336,181) | |
| Net subscriptions of consolidated funds | — | | | — | | | — | | | — | | | — | | | $ | 10,350,857 | |
| Balance at December 31, 2023 | 2,823,076 | | | $ | 22,164,410 | | | $ | (15,392,418) | | | $ | 153,544,816 | | | $ | 160,316,808 | | | — | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Shares Outstanding | | Common Stock | | Deferred Equity Compensation | | Retained Earnings | | Total | | Redeemable Noncontrolling Interest |
| Balance at January 1, 2015 | 3,317,728 |
| | $ | 84,855,693 |
| | $ | (12,566,133 | ) | | $ | 2,029,664 |
| | $ | 74,319,224 |
| | $ | — |
|
| Issuance of restricted stock grants | 92,050 |
| | 13,907,286 |
| | (13,907,286 | ) | | — |
| | — |
| | — |
|
| Amortization of restricted stock grants | — |
| | — |
| | 6,906,300 |
| | — |
| | 6,906,300 |
| | — |
|
| Issuance of stock grants | 27,192 |
| | 3,826,458 |
| | — |
| | — |
| | 3,826,458 |
| | — |
|
| Issuance of common stock related to 401k plan match | 9,336 |
| | 1,645,434 |
| | — |
| | — |
| | 1,645,434 |
| | — |
|
| Tax benefit from dividend payments related to restricted stock grants | — |
| | 376,394 |
| | — |
| | — |
| | 376,394 |
| | — |
|
| Net excess tax benefit from vested restricted stock grants | — |
| | 2,521,273 |
| | — |
| | — |
|
| 2,521,273 |
| | — |
|
| Shares withheld related to employee tax withholding | (28,468 | ) | | (4,323,676 | ) | | — |
| | — |
| | (4,323,676 | ) | | — |
|
| Forfeiture of restricted stock grants | (3,500 | ) | | (272,335 | ) | | 272,335 |
| | — |
| | — |
| | — |
|
| Cash dividend paid of $5.00 per share | — |
| | — |
| | — |
| | (17,031,890 | ) | | (17,031,890 | ) | | — |
|
| Net income | — |
| | — |
| | — |
| | 37,074,497 |
| | 37,074,497 |
| | — |
|
| Balance at December 31, 2015 | 3,414,338 |
| | $ | 102,536,527 |
| | $ | (19,294,784 | ) | | $ | 22,072,271 |
| | $ | 105,314,014 |
| | $ | — |
|
| Cumulative-effect adjustment from the adoption of ASU 2015-02 (Note 2) | — |
| | — |
| | — |
| | — |
| | — |
| | 4,031,756 |
|
| Issuance of restricted stock grants | 35,900 |
| | 7,504,564 |
| | (7,504,564 | ) | | — |
| | — |
| | — |
|
| Amortization of restricted stock grants | — |
| | — |
| | 6,466,797 |
| | — |
| | 6,466,797 |
| | — |
|
| Issuance of stock grants | 21,940 |
| | 3,879,431 |
| | — |
| | — |
| | 3,879,431 |
| | — |
|
| Issuance of common stock related to 401k plan match | 9,466 |
| | 1,738,287 |
| | — |
| | — |
| | 1,738,287 |
| | — |
|
| Tax benefit from dividend payments related to restricted stock grants | — |
| | 1,372,996 |
| | — |
| | — |
| | 1,372,996 |
| | — |
|
| Net excess tax benefit from vested restricted stock grants | — |
| | 4,895,907 |
| | — |
| | — |
| | 4,895,907 |
| | — |
|
| Shares withheld related to employee tax withholding | (53,018 | ) | | (10,029,464 | ) | | — |
| | — |
| | (10,029,464 | ) | | — |
|
| Forfeiture of restricted stock grants | (17,070 | ) | | (2,604,445 | ) | | 2,604,445 |
| | — |
| | — |
| | — |
|
| Cash dividend paid of $6.00 per share | — |
| | — |
| | — |
| | (20,465,736 | ) | | (20,465,736 | ) | | — |
|
| Net income | — |
| | — |
| | — |
| | 46,051,923 |
| | 46,051,923 |
| | 542,209 |
|
| Net subscriptions of consolidated funds | — |
| | — |
| | — |
| | — |
| | — |
| | 9,266,723 |
|
| Balance at December 31, 2016 | 3,411,556 |
| | $ | 109,293,803 |
| | $ | (17,728,106 | ) | | $ | 47,658,458 |
| | $ | 139,224,155 |
| | $ | 13,840,688 |
|
| Issuance of restricted stock grants | 57,350 |
| | 8,454,411 |
| | (8,454,411 | ) | | — |
| | — |
| | — |
|
| Amortization of restricted stock grants | — |
| | — |
| | 6,871,284 |
| | — |
| | 6,871,284 |
| | — |
|
| Issuance of stock grants | 19,219 |
| | 3,892,424 |
| | — |
| | — |
| | 3,892,424 |
| | — |
|
| Issuance of common stock related to 401k plan match | 8,478 |
| | 1,710,785 |
| | — |
| | — |
| | 1,710,785 |
| | — |
|
| Shares withheld related to employee tax withholding | (24,425 | ) | | (4,966,042 | ) | | — |
| | — |
| | (4,966,042 | ) | | — |
|
| Forfeiture of restricted stock grants | (1,750 | ) | | (176,270 | ) | | 176,270 |
| | — |
| | — |
| | — |
|
| Cash dividend paid of $7.00 per share | — |
| | — |
| | — |
| | (24,277,743 | ) | | (24,277,743 | ) | | — |
|
| Net income | — |
| | — |
| | — |
| | 49,988,957 |
| | 49,988,957 |
| | 1,612,712 |
|
| Net subscriptions of consolidated funds | — |
| | — |
| | — |
| | — |
| | — |
| | 4,623,406 |
|
| Balance at December 31, 2017 | 3,470,428 |
| | $ | 118,209,111 |
| | $ | (19,134,963 | ) | | $ | 73,369,672 |
| | $ | 172,443,820 |
| | $ | 20,076,806 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Diamond Hill Investment Group, Inc.
Consolidated Statements of Cash Flows
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | |
| Net Income | $ | 51,601,669 |
| | $ | 46,594,132 |
| | $ | 37,074,497 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation | 888,197 |
| | 712,112 |
| | 625,788 |
|
| Share-based compensation | 8,582,069 |
| | 8,205,084 |
| | 8,551,734 |
|
| Decrease (increase) in accounts receivable | (1,615,070 | ) | | 486,491 |
| | (2,065,156 | ) |
| Change in current income taxes | (3,003,072 | ) | | 6,559,150 |
| | 316,910 |
|
| Change in deferred income taxes | 2,893,063 |
| | 469,312 |
| | (3,547,087 | ) |
| Gain on sale of subsidiary | — |
| | (2,675,766 | ) | | — |
|
| Net (gains)/losses on investments | (9,730,751 | ) | | (5,471,469 | ) | | 1,860,360 |
|
| Net change in trading securities held by Consolidated Funds | (5,511,669 | ) | | (41,674,992 | ) | | — |
|
| Increase in accrued incentive compensation | 6,705,424 |
| | 4,578,431 |
| | 5,829,708 |
|
| Increase in deferred compensation | 6,298,320 |
| | 3,945,727 |
| | 4,557,979 |
|
| Excess income tax benefit from share-based compensation | — |
| | (4,895,907 | ) | | (2,521,273 | ) |
| Income tax benefit from dividends paid on restricted stock | — |
| | (1,372,996 | ) | | (376,394 | ) |
| Other changes in assets and liabilities | 3,811,579 |
| | 4,612,437 |
| | 1,724,253 |
|
| Net cash provided by operating activities | 60,919,759 |
| | 20,071,746 |
| | 52,031,319 |
|
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | |
| Purchase of property and equipment | (1,106,520 | ) | | (484,509 | ) | | (1,550,857 | ) |
| Purchase of Company sponsored investments | (21,044,429 | ) | | (25,953,000 | ) | | (22,095,491 | ) |
| Proceeds from sale of Company sponsored investments | 2,597,130 |
| | 19,543,607 |
| | 11,770,565 |
|
| Proceeds from sale of subsidiary, net of cash disposed | 1,000,000 |
| | 1,163,769 |
| | — |
|
| Net cash used in investing activities | (18,553,819 | ) | | (5,730,133 | ) | | (11,875,783 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | |
| Value of shares withheld related to employee tax withholding | (4,966,042 | ) | | (10,029,464 | ) | | (4,323,676 | ) |
| Excess income tax benefit from share-based compensation | — |
| | 4,895,907 |
| | 2,521,273 |
|
| Income tax benefit from dividends paid on restricted stock | — |
| | 1,372,996 |
| | 376,394 |
|
| Payment of dividends | (24,277,743 | ) | | (20,465,736 | ) | | (17,031,890 | ) |
| Net subscriptions received from redeemable noncontrolling interest holders | 6,290,077 |
| | 9,599,783 |
| | — |
|
| Net cash used in financing activities | (22,953,708 | ) | | (14,626,514 | ) | | (18,457,899 | ) |
| CASH AND CASH EQUIVALENTS | | | | | |
| Net change during the year | 19,412,232 |
| | (284,901 | ) | | 21,697,637 |
|
| At beginning of year | 57,189,876 |
| | 57,474,777 |
| | 35,777,140 |
|
| At end of year | $ | 76,602,108 |
| | $ | 57,189,876 |
| | $ | 57,474,777 |
|
| Supplemental cash flow information: | | | | | |
| Income taxes paid | $ | 29,527,299 |
| | $ | 19,639,173 |
| | $ | 24,138,841 |
|
| Supplemental disclosure of non-cash transactions: | | | | | |
| Charitable donation of corporate investments and property and equipment | 1,748,841 |
| | 1,729,735 |
| | 1,401,202 |
|
| Common stock issued as incentive compensation | 3,892,424 |
| | 3,879,431 |
| | 3,826,458 |
|
| Cumulative-effect adjustment from the adoption of ASU 2015-02 (Note 2) | — |
| | 4,031,756 |
| | — |
|
| Net redemptions of ETF Shares for marketable securities | (1,555,305 | ) | | (244,200 | ) | | — |
|
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | |
| Net income | $ | 43,085,548 | | | $ | 36,870,762 | | | $ | 75,589,539 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation | 1,289,315 | | | 1,377,610 | | | 1,281,420 | |
| Share-based compensation | 11,691,890 | | | 10,660,673 | | | 7,415,170 | |
| Increase (decrease) in accounts receivable | (3,393,686) | | | 3,107,409 | | | (2,666,551) | |
| Change in current income taxes | (157,317) | | | (2,265,287) | | | 1,058,278 | |
| Change in deferred income taxes | 2,783,768 | | | (4,526,654) | | | (1,410,106) | |
| Gain on sale of High Yield-Focused Advisory Contracts | — | | | (6,813,579) | | | (9,000,000) | |
| Net loss (gain) on investments | (16,536,677) | | | 24,471,894 | | | (10,878,658) | |
| Net change in securities held by Consolidated Funds | (10,930,911) | | | (14,039,687) | | | (50,430,607) | |
| Increase (decrease) in accrued incentive compensation | (2,600,000) | | | (4,647,548) | | | 9,365,224 | |
| Increase (decrease) in deferred compensation | 5,342,180 | | | (6,603,304) | | | 4,106,342 | |
| Other changes in assets and liabilities | 4,095,014 | | | 1,890,346 | | | 1,882,186 | |
| Net cash provided by operating activities | 34,669,124 | | | 39,482,635 | | | 26,312,237 | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | |
| Purchase of property and equipment | (21,705) | | | (101,454) | | | (1,104,981) | |
| Purchase of Company sponsored investments | (19,469,955) | | | (7,606,958) | | | (21,395,411) | |
| Proceeds from sale of Company sponsored investments | 15,286,036 | | | 6,928,704 | | | 40,764,891 | |
| | | | | |
| Proceeds from sale of High Yield-Focused Advisory Contracts | — | | | 6,813,579 | | | 9,000,000 | |
| Net cash provided by (used in) investing activities | (4,205,624) | | | 6,033,871 | | | 27,264,499 | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | |
| Value of shares withheld related to employee tax withholding obligations | (5,131,262) | | | (3,436,678) | | | (1,625,413) | |
| Payment of dividends | (17,676,364) | | | (30,696,907) | | | (72,960,976) | |
| Net subscriptions received from redeemable noncontrolling interest holders | 10,350,857 | | | 9,461,710 | | | 10,298,891 | |
| Repurchase of common shares | (34,619,944) | | | (38,726,007) | | | (7,820,315) | |
| Proceeds received under employee stock purchase plan | 409,790 | | | 526,285 | | | 603,268 | |
| Net cash used in financing activities | (46,666,923) | | | (62,871,597) | | | (71,504,545) | |
| CASH AND CASH EQUIVALENTS | | | | | |
| Net change during the year | (16,203,423) | | | (17,355,091) | | | (17,927,809) | |
| At beginning of year | 63,195,302 | | | 80,550,393 | | | 98,478,202 | |
| At end of year | $ | 46,991,879 | | | $ | 63,195,302 | | | $ | 80,550,393 | |
| Supplemental cash flow information: | | | | | |
| Income taxes paid | $ | 12,863,429 | | | $ | 20,879,724 | | | $ | 26,401,643 | |
| | | | | |
| Supplemental disclosure of non-cash transactions: | | | | | |
| Common stock issued as incentive compensation | — | | | $ | 487,870 | | | $ | 529,806 | |
| Charitable donation of corporate investments | — | | | — | | | $ | 366,555 | |
| | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
Diamond Hill Investment Group, Inc.
Notes to Consolidated Financial Statements
Note 1 Business and Organization
Diamond Hill Investment Group, Inc. (the “Company”), an Ohio corporation,DHIL derives its consolidated revenues and net income from investment advisory and fund administration services.
Diamond Hill Capital Management, Inc. (“DHCM”), an Ohio corporation,services provided by DHCM. DHCM is a wholly owned subsidiary of the Company and a registered investment adviser. DHCM is the investment adviser to the Diamond Hill Funds (the “Funds”), a series of open-end mutual funds, private investment funds (“Private Funds”), an exchange traded fund ("ETF"), and other institutional accounts. In addition, DHCM is administrator for the Funds.
Beacon Hill Fund Services, Inc. (“BHFS”) and BHIL Distributors, Inc. (“BHIL”), collectively operated as "Beacon Hill," were operating subsidiaries of the Company. The Company sold Beacon Hill on July 31, 2016. Prior to the sale, Beacon Hill provided compliance, treasury, underwriting and other fund administration DHCM also provides investment advisory services to investment advisersDHMF, a private fund, separately managed accounts, CITs, other pooled vehicles including sub-advised funds, and mutual funds. See Note 11.model delivery programs.
Note 2 Significant Accounting Policies
Basis of Presentation
The accompanying Consolidated Financial Statementsconsolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the U. S. Securities and Exchange Commission ("SEC")SEC and in accordance with the instructions to Form 10-K. The Company believes that the disclosures contained herein are adequate to make the information presented not misleading.
These Consolidated Financial Statementsconsolidated financial statements reflect, in the opinion of the Company, all material adjustments (which include only normal recurring adjustments) necessary to fairly present the Company’s financial position as of December 31, 20172023 and 2016,2022, and results of operations for the years ended December 31, 2017, 20162023, 2022 and 2015. 2021.
Use of Estimates
The preparation of the Consolidated Financial Statementsconsolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities atas of the date of the financial statements as well as the reported amounts of revenue and expense during the reporting period. Estimates have been prepared based on the basis of the most current and best available information, but actual results could differ materially from those estimates.
Book value per share is computed by dividing total shareholders' equity by the number of shares issued and outstanding at the end of the measurement period.
Reclassification
Certain prior period amounts and disclosures may have been reclassified to conform to the current period's financial presentation.
Principles of Consolidation
The accompanying consolidated financial statements include the operations of the CompanyDHIL and its controlledconsolidated subsidiaries. All inter-company transactions and balances have been eliminated in consolidation.
The CompanyDHCM holds certain investments in the Funds and the ETFDHMF for general corporate investment purposes, to provide seed capital for newly formed strategies, or to add capital to existing strategies. The Funds are organized in a series fund structure in which there are multiple mutual funds within one Trust.trust (the “Trust”). The Trust is an open-end investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"“1940 Act”). The ETF is anEach individual series of ETF Series Solutions which is also an open-end investment company registered under the 1940 Act. Each of the individual mutual funds and the ETF representFund represents a separate share class of a legal entity organized under the Trust. AsDHMF is organized as a Delaware limited partnership and is exempt from registration under the 1940 Act.
DHIL consolidates those subsidiaries and investments over which it has a controlling interest. The Company is generally deemed to have a controlling interest when it owns the majority of January 1, 2016, the voting interest of a voting rights entity (“VRE”) or is deemed to be the primary beneficiary of a variable interest entity (“VIE”). A VIE is an entity that lacks sufficient equity to finance its activities, or any entity whose equity holders do not have defined power to direct the activities of the entity normally associated with an equity investment. The Company’s analysis to determine whether an entity is a VIE or a VRE involves judgment and consideration of several factors, including an entity’s legal organization, equity structure, the rights of the investment holders, the Company’s ownership interest in the entity, and the Company’s contractual involvement with the entity. The Company adopted ASU 2015-02 - Consolidation (Topic 810): Amendmentscontinually reviews and reconsiders its controlling interest, VIE or VRE conclusions upon the occurrence of certain events, such as changes to the Consolidation Analysis ("ASU 2015-02") and we have performed ourits ownership interest, or amendments to contract documents.
The Company performs its consolidation analysis at the individual mutual fund and ETFFund level and have concluded the mutual funds and ETF are VREs. The Company has concluded that the mutual funds and the ETFFunds are VREs because the structure of the investment productFunds is such that the shareholders are deemed to have the power through voting rights to direct the activities that most significantly impact the entity'seach Fund’s economic performance. To the extent material, these investment productsThe Funds are consolidated if CompanyDHIL ownership, directly or indirectly, represents a majority interest (greater than 50%). The Company records redeemable noncontrolling interests in consolidated investments for which the Company'sCompany’s ownership is less than 100%. TheAs of December 31, 2023, the Company has not consolidated any of the Funds. As of December 31, 2022, the Company consolidated the ETFDiamond Hill International Fund. As of December 31, 2021, the Company consolidated the Diamond Hill International Fund and the Diamond Hill Core BondLarge Cap Concentrated Fund. The Company deconsolidated the Diamond Hill International Fund oneduring the
year ended December 31, 2023 and deconsolidated the "Consolidated Funds")Diamond Hill Large Cap Concentrated Fund during the year ended December 31, 2022, as ourthe Company’s ownership was greaterdeclined to less than 50% induring each as of these years. The Company also deconsolidated the Diamond Hill Global Fund during the year ended December 31, 2017 and 2016.
We adopted ASU 2015-02 utilizing2021, as the modified retrospective transition method and have recorded a cumulative-effect adjustmentFund was liquidated on December 17, 2021. The Fund(s) consolidated during the applicable period are referred to equity of $4.0 million as of January 1, 2016. Prior to the adoption of ASU 2015-02, we performed our analysis at the Trust level and concluded we did not need to consolidate the Funds or the ETF as we owned less than 1% of the voting interest in the respective Trusts.“Consolidated Fund(s).”
DHCM is the investment advisor of DHMF and is the managing member of Diamond Hill General Partner,Fund GP, LLC (the “General Partner”), which is the general partner of Diamond Hill Investment Partners, L.P. (“DHIP”), Diamond Hill Global Fund, L.P. ("DHGF"), and Diamond Hill International Equity Fund, L.P. ("DHIEF"), each a limited partnership (collectively, the "Partnerships" or "LPs") whose underlying assets consist primarily of marketable securities.
DHMF. DHCM is wholly ownedwholly-owned by, the Company and is consolidated by us.with, DHIL. Further, DHCM through its control of the General Partner, DHCM has the power to direct each LP’sDHMF’s economic activities and the right to receive investment advisory fees from DHMF that may be significant to the LPs.significant. DHMF commenced operations on June 1, 2021, and its underlying assets consist primarily of marketable securities.
The Company concluded we did not haveDHMF was a variable interest in DHIP as the fees paid to the General Partner are considered to contain customary terms and conditions as found in the market for similar products and the Company has no equity ownership in DHIP.
The Company concluded DHGF and DHIEF were VIEs asVIE given that: (i) DHCM has disproportionately less voting interestsinterest than economic interests in each LP, given theinterest, and (ii) DHMF’s limited partners have full power to remove the Company as the General Partner (which is controlled by DHCM, which is controlled by DHIL) due to the existence of substantive kick-out rights. In addition, substantially all of the LPs'DHMF’s activities are conducted on behalf of the General Partner, which has disproportionately few voting rights. The Company concluded we areit is not the primary beneficiary of DHGF or DHIEFDHMF as we lackit lacks the power to control the entities due to the existence ofDHMF, since DHMF’s limited partners have single-party kick-out rights where the limited partners have the unilateral ability toand can unilaterally remove the General Partner without cause. DHCM’s investments in DHGF and DHIEFDHMF are reported as a component of the Company’s investment portfolio and valued at DHCM’s respective share of theDHMF's net income or loss of each LP.loss.
The LPs are not subject to lock-up periods and can be redeemed on demand.
Gains and losses attributable to changes in the value of DHCM’s interests in the LPsDHMF are included in the Company’s reported investment income. The Company’s exposure to loss as a result of its involvement with the LPsDHMF is limited to the amount of its investments.investment. DHCM is not obligated to provide, and has not provided, financial or other support to the LPs, other thanDHMF, except for its investments to date and its contractually provided investment advisory responsibilities. The Company has not provided liquidity arrangements, guarantees, or other commitments to support the LPs’DHMF’s operations, and the LPs’DHMF’s creditors and interest holders have no recourse to the general credit of the Company.
Certain board members, officers and employees of the Company invest in the LPs and are not subject to a management fee or an incentive fee. These individuals receive no remuneration as a result of their personal investment in the LPs. The capital of the General Partner is not subject to a management fee or an incentive fee.
Redeemable Noncontrolling Interest
Redeemable noncontrolling interest represents third-party interests in the Consolidated Funds. This interest is redeemable at the option of the investors, and therefore, is not treated as permanent equity. Redeemable noncontrolling interest is remeasuredrecorded at redemption value, which approximates the fair value each reporting period.
Segment Information
Management has determined that the Company operates in onea single business segment, which is providing investment managementadvisory and administrationrelated services to mutualclients through pooled vehicles, including the Funds and DHMF, separately managed accounts, CITs, other pooled vehicles including sub-advised funds, institutional accounts, and private investment funds.model delivery programs. Therefore, nothe Company does not present disclosures relating to operating segments are presented in the annual or interim financial statements.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits and money market mutual funds.funds held by DHCM. The Company considers all highly liquid temporary cash instruments with an original maturity of three months or less to be cash equivalents. The Company places its cash on deposit with U.S. financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. The Company’s credit risk in the event of failure of these financial institutions is represented by the difference between the FDIC limit and the total amount on deposit. Management monitors the financial institutions’ creditworthiness in conjunction with balances on deposit to minimize risk. The Company from time to time may have amounts on deposit in excess of the insured limits. As of December 31, 2023, the Company had $2.8 million and $44.2 million in demand deposits and money market mutual funds, respectively. As of December 31, 2022, the Company had $2.8 million and $60.4 million in demand deposits and money market mutual funds, respectively.
Accounts Receivable
AccountsThe Company records accounts receivable are recorded when they are due and are presentedpresents them on the balance sheet net of any allowance for doubtful accounts. Accounts receivable are written off when they are determined to be uncollectible. Any allowance for doubtful accounts is estimated based on the Company’s historical losses, existing conditions in the industry, and the financial stability of
those individuals the individual or entitiesentity that oweowes the receivable. No allowance for doubtful accounts was deemed necessary at either December 31, 20172023 or 2016.2022. Accounts Receivablereceivable from the Funds were $11.6$9.1 million and $10.4$9.3 million as of December 31, 20172023 and 2016,2022, respectively.
Investments
Management determines the appropriate classification of itsthe Company’s investments at the time of purchase and re-evaluates its determination atfor each reporting period.
Investments classified as trading representCompany sponsored investments, in the Funds where the Company has neither the control nor the ability to exercise significant influence, as well as securities held in the Consolidated Funds. These investmentsFunds, are measured at fair value based on quoted market prices. Unrealized gains and losses are recorded as investment income (loss) in the Company's consolidated statements of income.
Investments classified as equity method investments represent investments in which the Company owns between 20-50%20% to 50% of the outstanding voting interests in the entity or whenwhere it is determined that the Company is able to exercise significant influence but not control over the investments. When using the equity method, the Company recognizes its respective share of the investee'sinvestee’s net income or loss for the period, which is recorded as investment income (loss) in the Company'sCompany’s consolidated statements of income.
Fair Value Measurements
Accounting Standards Codification Topic 820, Fair Value Measurement ("ASC 820") specifies a hierarchy of valuation classifications based on whether the inputs to the valuation techniques used in each valuation classification are observable or unobservable. These classifications are summarized in the three broad levels listed below:
Level 1 - Unadjusted quoted prices for identical instruments in active markets.
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-driven valuations in which all significant inputs are observable.
Level 3 - Valuations derived from techniques in which significant inputs are unobservable.
Inputs used to measure fair value might fall in different levels of the fair value hierarchy, in which case the Company defaults to the lowest level input that is significant to the fair value measurement in its entirety. These levels are not necessarily an indication of the risk or liquidity associated with investments. The following table summarizes investments that are recognized in our consolidated balance sheet using fair value measurements (excludes investments classified as equity method investments) determined based upon the differing levels of inputs as of December 31, 2017 and 2016:
|
| | | | | | | | | | | | |
| December 31, 2017 | Level 1 | Level 2 | Level 3 | Total |
| Cash equivalents | $ | 72,669,083 |
| $ | — |
| $ | — |
| $ | 72,669,083 |
|
| Trading Investments | | | | |
Securities held in Consolidated Funds(a) | 24,618,578 |
| 41,271,922 |
| — |
| $ | 65,890,500 |
|
| Company sponsored investments | 36,541,818 |
| — |
| — |
| $ | 36,541,818 |
|
| | | | | |
| December 31, 2016 | | | | |
| Cash equivalents | 47,717,187 |
| — |
| — |
| $ | 47,717,187 |
|
| Trading Investments | | | | |
Securities held in Consolidated Funds(a) | 19,835,458 |
| 37,520,013 |
| — |
| $ | 57,355,471 |
|
| Company sponsored investments | 9,322,118 |
| — |
| — |
| $ | 9,322,118 |
|
(a) Of the equity interests in the Consolidated Funds as of December 31, 2017, $42.6 million were held directly by the Company and $23.3 million were held by noncontrolling shareholders. Of the equity interests in the Consolidated Funds as of December 31, 2016, $42.6 million were held directly by the Company and $14.7 million were held by noncontrolling shareholders.
Level 1 investments are all registered investment companies (mutual funds) or equity securities held in the Consolidated Funds and include, as of December 31, 2017 and 2016, $72.7 million and $47.7 million, respectively, of investments in money market mutual funds that the Company classifies as cash equivalents.
Level 2 investments are comprised of investments in debt securities held in the Consolidated Funds, which are valued by an independent pricing service using pricing techniques which take into account factors such as trading activity, readily available market quotations, yield, quality, coupon rate, maturity, type of issue, trading characteristics, call features, credit rates and other observable inputs.
The Company determines transfers between fair value hierarchy levels at the end of the reporting period. There were no transfers in or out of the levels during any of the years ended December 31, 2017, 2016, and 2015.
Changes in fair values on the investments are recorded in the Company's consolidated statements of income as investment income (loss), net.
Property and Equipment
Property and equipment, consisting of leasehold improvements, right-of-use lease assets, computer equipment, capitalized software, furniture, and fixtures are carried at cost less accumulated depreciation. Accumulated depreciation was $4.0$10.2 million and $3.3$8.9 million as of December 31, 20172023 and 2016,2022, respectively. Depreciation is calculated using the straight-line method over the estimated lives of the assets.
Implementation costs incurred to develop or obtain internal-use software, including hosting arrangements, are capitalized and expensed on a straight-line basis over either the estimated useful life of the assets.respective software or the term of the hosting arrangement.
Property and equipment is tested for impairment when there is an indication that the carrying amount of an asset may not be recoverable. When an asset is determined to not be recoverable, the impairment loss is measured based on the excess, if any, of the carrying value of the asset over its fair value.
Revenue Recognition – General
The Company recognizes revenue when DHCM satisfies performance obligations under the terms of a contract with a client. The Company earns substantially all of its revenue from DHCM investment advisory and fund administration services.contracts. Investment advisory and fund administration fees, generally calculated as a percentage of assets under management ("AUM"),AUM, are recorded as revenue as services are performed. In addition to fixed fees based on a percentage of AUM, certain client accounts also provide periodic variable rateperformance-based fees. Total revenue
Revenue from the Fundscontracts with clients that was $116.7 million, $100.8 million and $93.6 million forearned during the years ended December 31, 2017, 20162023, 2022 and 2015, respectively.2021 include:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2023 |
| Investment advisory | | Mutual fund
administration, net | | Total revenue |
| Diamond Hill Funds | $ | 84,810,452 | | | $ | 7,536,871 | | | $ | 92,347,323 | |
| Separately managed accounts, excluding performance-based fees | 24,898,695 | | | — | | | 24,898,695 | |
| Performance-based fees | 1,176,351 | | | — | | | 1,176,351 | |
| Other pooled vehicles | 9,261,533 | | | — | | | 9,261,533 | |
| Model delivery | 5,211,113 | | | — | | | 5,211,113 | |
| Collective investment trusts | 3,821,356 | | | — | | | 3,821,356 | |
| $ | 129,179,500 | | | $ | 7,536,871 | | | $ | 136,716,371 | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 |
| Investment advisory | | Mutual fund
administration, net | | Total revenue |
| Diamond Hill Funds | $ | 98,873,571 | | | $ | 10,170,502 | | | $ | 109,044,073 | |
| Separately managed accounts, excluding performance-based fees | 26,200,724 | | | — | | | 26,200,724 | |
| Performance-based fees | 1,500,225 | | | — | | | 1,500,225 | |
| Other pooled vehicles | 9,410,541 | | | — | | | 9,410,541 | |
| Model delivery | 5,910,061 | | | — | | | 5,910,061 | |
| Collective investment trusts | 2,430,395 | | | — | | | 2,430,395 | |
| $ | 144,325,517 | | | $ | 10,170,502 | | | $ | 154,496,019 | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
| Investment advisory | | Mutual fund
administration, net | | Total revenue |
| Diamond Hill Funds | $ | 113,602,317 | | | $ | 12,056,228 | | | $ | 125,658,545 | |
| Separately managed accounts, excluding performance-based fees | 27,882,488 | | | — | | | 27,882,488 | |
| Performance-based fees | 11,860,051 | | | — | | | 11,860,051 | |
| Other pooled vehicles | 10,166,928 | | | — | | | 10,166,928 | |
| Model delivery | 4,977,234 | | | — | | | 4,977,234 | |
| Collective investment trusts | 1,648,591 | | | — | | | 1,648,591 | |
| $ | 170,137,609 | | | $ | 12,056,228 | | | $ | 182,193,837 | |
Revenue Recognition – Variable RateInvestment Advisory Fees
DHCM’s investment advisory contracts with clients have a single performance obligation because the contracted services are not separately identifiable from other obligations in the contracts, and therefore, are not distinct. All obligations to provide investment advisory services are satisfied over time by DHCM.
The Companyfees DHCM receives for its services under its investment advisory contracts are based on AUM, which changes based on the value of securities held under each investment advisory contract. These fees are thereby constrained and represent variable consideration, and they are excluded from revenue until the AUM on which DHCM’s client is billed is no longer subject to market fluctuations.
DHCM also provides its strategy model portfolios and related services to sponsors of model delivery programs. For its services, DHCM is paid a model delivery fee by the program sponsor at a pre-determined rate based on the amount of AUA in the program.
Revenue Recognition – Performance-Based Fees
DHCM manages certain client accounts that provide for variable ratepay performance-based fees. These fees are calculated based on client investment results over rolling five-year periods. The Company records variable rateperformance-based fees at the endwhen it is probable that a significant reversal of the contract measurement period.revenue will not occur. During the years ended December 31, 2017, 2016,2023, 2022, and 2015,2021, the Company recorded $0.2$1.2 million, $6.4$1.5 million, and $0.0$11.9 million, respectively, in variable rateperformance-based fees. The Company recorded $11.9 million of performance-based fees uponduring the early terminationyear ended December 31, 2021, as a significant performance-based agreement reached the end of variable rateits first five-year measurement period on September 30, 2021. After the initial five-year contract measurement term, the performance-based fee contracts.
is calculated annually based on the client investment results over the recently completed five-year period. The table below showsCompany’s next performance measurement period will be the twelve months ending September 30, 2024. AUM subject to variable rateperformance-based fees and the amount of variable rate fees that would be recognized based upon investment resultswas approximately $518.9 million as of December 31, 2017:
|
| | | | | | | |
| | As of December 31, 2017 |
| | AUM subject to variable rate fees | | Unearned variable rate fees |
| Contractual Period Ends: | | | |
| Quarter Ended December 31, 2018 | $ | 105,909,958 |
| | $ | 1,557,038 |
|
| Quarter Ended September 30, 2019 | 36,046,820 |
| | 548,700 |
|
| Quarter Ended March 31, 2020 | 12,655,485 |
| | — |
|
| Quarter Ended September 30, 2021 | 280,124,936 |
| | 2,524,606 |
|
| Total | $ | 434,737,199 |
| | $ | 4,630,344 |
|
The contractual end dates highlight the time remaining until the variable rate fees are scheduled to be earned. The amount of variable rate fees that would be recognized based upon investments results as of December 31, 2017 will increase or decrease based on future client investment results through the contractual period end. There can be no assurance that the unearned amounts will ultimately be earned.
2023.
Revenue Recognition – Mutual Fund Administration
DHCM has an administrative and transfer agency services agreement with the Funds under which DHCM performs certain services for each Fund. These services include performance obligations such as mutual fund administration, fund accounting, transfer agency, and other related functions. For performingThese services are performed concurrently under DHCM’s agreement with the Funds, all performance obligations to provide these administrative services eachare satisfied over time, and the Company recognizes the related revenue as time progresses. Each Fund pays DHCM a fee for performing these services, which is calculated using an annual rate timesmultiplied by the average daily net assets of each respective Fund share class. These fees are thereby constrained and represent variable consideration, and they are excluded from revenue until the AUM on which DHCM bills the Funds is no longer subject to market fluctuations.
The Funds have selected and contractually engaged certain vendors to fulfill various services to benefit the Funds’ shareholders or to satisfy regulatory requirements of the Funds. These services include, among others, required shareholder mailings, federal and state registrations, and legal and audit services. DHCM, inIn fulfilling a portion of its role under the administration and transfer agency services agreement with the Funds, DHCM acts as agent to payand pays for these obligationsservices on behalf of the Funds. Each vendor is independently responsible for fulfillment of the services it has been engaged to provide and negotiates its fees and terms directly with the Funds’ management and board of trustees. Each year, the Funds’ board of trustees ofreviews the Funds. The fee that each Fund pays to DHCM, is reviewed annually by the Funds’ board of trustees and specifically takes into accountconsiders the contractual expenses that DHCM pays on behalf of the Funds. As a result, DHCM is not involved in the delivery or pricing of these services, and bears no risk related to these services. Revenue has been recorded net of these Fund related expenses in accordance with FASB ASC 605-45, Revenue Recognition – Principal Agent Considerations. In addition, DHCM advances the upfront commissions which are paid to brokers who sell Class C shares of the Funds. These advances are capitalized and amortized over 12 months to correspond with the repayments DHCM receives from the principal underwriter to recoup this commission advancement.
Prior to the sale of Beacon Hill, the Company, through Beacon Hill, had underwriting and administrative service agreements with certain clients, including registered mutual funds. The fee arrangements varied from client to client based upon services provided and have been recorded as revenue under mutual fund administration on the Company's consolidated statements of income. Part of Beacon Hill’s role as underwriter was to act as an agent on behalf of its mutual fund clients to receive 12b-1/service fees and commission revenue and facilitate the payment of those fees and commissions to third parties who provide services to the funds and their shareholders. The majority of 12b-1/service fees were paid to independent third parties and the remainder were retained by the Company as a reimbursement of expenses the Company had incurred. The amounts of 12b-1/service fees and commissions were determined by each mutual fund client, and Beacon Hill bore no financial risk related to these services. As a result, 12b-1/service fees and commission revenue was recorded net of the expense payments to third parties, in accordance with the appropriate accounting treatment for this agency relationship.Fund-related expenses.
Mutual fund administration gross and net revenue are summarized below:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Mutual fund administration: | | | | | |
| DHCM Revenue, net of related expenses | | | | | |
| Administration revenue, gross | $ | 26,219,881 |
| | $ | 26,664,635 |
| | $ | 27,042,861 |
|
| 12b-1/service fees and commission revenue received from fund clients | — |
| | 6,360,400 |
| | 11,087,978 |
|
| 12b-1/service fees and commission expense payments to third parties | — |
| | (5,660,430 | ) | | (9,617,568 | ) |
| Fund related expense | (13,748,445 | ) | | (12,937,067 | ) | | (12,031,353 | ) |
| Revenue, net of related expenses | 12,471,436 |
| | 14,427,538 |
| | 16,481,918 |
|
| DHCM C-Share financing: | | | | | |
| Broker commission advance repayments | 416,614 |
| | 691,228 |
| | 991,430 |
|
| Broker commission amortization | (374,783 | ) | | (660,840 | ) | | (962,919 | ) |
| Financing activity, net | 41,831 |
| | 30,388 |
| | 28,511 |
|
| Mutual fund administration revenue, net | $ | 12,513,267 |
| | $ | 14,457,926 |
| | $ | 16,510,429 |
|
Mutual fund administrative net revenue from the Funds was $12.5 million, $11.9 million and $12.9 million for the years ended December 31, 2017, 2016 and 2015, respectively. | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| Mutual fund administration: | | | | | |
| Administration revenue, gross | $ | 21,597,721 | | | $ | 25,188,386 | | | $ | 29,635,451 | |
| Fund related expense | (14,060,850) | | | (15,017,884) | | | (17,579,223) | |
| Mutual fund administration revenue, net | $ | 7,536,871 | | | $ | 10,170,502 | | | $ | 12,056,228 | |
Income Taxes
The Company accounts for current and deferred income taxes through an asset and liability approach. Deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences.
Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The Company is subject to examination by federal and applicable state and local jurisdictions for various tax periods. The Company’s income tax positions are based on research and interpretations of the income tax laws and rulings in each of the jurisdictions in which it does business. Due to the subjectivity of interpretations of laws and rulings in each jurisdiction, the differences and interplay in tax laws among those jurisdictions, as well asand the inherent uncertainty in estimating the final resolution of complex tax audit matters, the Company’s estimates of income tax liabilities may differ materially from actual payments or assessments. The Company regularly assesses its positionpositions with regard to tax exposures and records liabilities for these uncertain tax positions and related interest and penalties, if any, according to the principles of FASB ASCFinancial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) 740, Income Taxes. As of December 31, 2017, the Company has not recorded any liability for uncertain tax positions.Taxes. The Company records interest and penalties if any, within income tax expense on the income statement. See Note 8.9.
Earnings Per Share
Basic and diluted earnings per share (“EPS”) excludes dilution and isare computed by dividing net income attributable to common shareholders by the
weighted average number of DHIL common shares outstanding for the period, which includes participating securities. Diluted EPS reflects the potential dilution of EPS due to unvested restricted stock grants with forfeitable rights to dividends and restricted stock units.shares. See Note 9.10.
Recently Adopted Accounting Guidance
The Company did not adopt any new accounting guidance during the year ended December 31, 2023 that had a material effect on its financial position or results of operations.
Newly Issued But Not Yet Adopted Accounting StandardsGuidance
In May 2014,December 2023, the Financial Accounting Standards Board ("FASB")FASB issued Accounting Standards Update ("ASU"(“ASU”) 2014-09, "Revenue from Contracts with Customers", which supersedes existing accounting standards for revenue recognitionNo. 2023-09, “Improvements to Income Tax Disclosures.” This update requires certain revisions to income tax disclosures, primarily disclosures related to rate reconciliation and creates a single framework.income taxes paid. ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This standard also specifies the accounting for certain costs to obtain or fulfill a contract with a customer. This ASU will supersede much of the existing revenue recognition guidance in GAAP and2023-09 is effective for fiscal yearsfinancial statements issued for annual periods beginning after December 15, 2017, including interim periods within that reporting period, and requires either a retrospective or a modified retrospective approach to adoption. We will adopt the new ASU on its effective date, January 1, 2018, and expect to utilize the full retrospective approach. Our implementation efforts include a detailed review of revenue contracts within the scope of the guidance and evaluation of the impact on the Company's revenue recognition policies. While we are continuing to assess the potential impacts of the ASU on our financial position and results of operations, we2024. The Company does not believe that the adoption of this ASU 2023-09 will not have anmaterially impact on revenue recognition. While we have not identified changes in the timing of revenue recognition, we continue to evaluate the related disclosures.its financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases", which, among other things, requires lessees to recognize most leases on-balance sheet. This will increase lessees' reported assets and liabilities - in some cases significantly. Lessor accounting remains substantially similar to current GAAP. ASU 2016-02 supersedes Topic 840, Leases. ASU 2016-02 is effective for annual and interim periods in fiscal years beginning after December 15, 2018. ASU 2016-02 mandates a modified retrospective transition method for all entities. The Company is currently assessing the impact of this standard on its consolidated financial statements and related disclosures.
Note 3 Investment PortfolioInvestments
As of December 31, 2017, the Company held investments (excluding money market funds, which are included with cash and cash equivalents) worth $138.5 million. The following table summarizes the carrying value of thesethe Company’s investments as of December 31, 20172023 and 2016:2022:
|
| | | | | | | |
| | As of December 31, |
| | 2017 | | 2016 |
| Trading investments: | | | |
Securities held in Consolidated Funds(a) | $ | 65,890,500 |
| | $ | 57,355,471 |
|
| Company sponsored investments | 36,541,818 |
| | 9,322,118 |
|
| Company sponsored equity method investments | 36,043,704 |
| | 41,338,046 |
|
| Total Investment portfolio | $ | 138,476,022 |
| | $ | 108,015,635 |
|
| | | | | | | | | | | |
| As of December 31, |
| 2023 | | 2022 |
| Fair value investments: | | | |
Securities held in Consolidated Funds(a) | — | | | $ | 54,740,993 | |
| Company-sponsored investments | $ | 63,208,573 | | | 66,828,910 | |
| Company-sponsored equity method investments | 84,530,289 | | | 24,105,808 | |
| Total Investments | $ | 147,738,862 | | | $ | 145,675,711 | |
(a) Of the securities held in the Consolidated Funds as of December 31, 2017, $42.62022, DHCM directly held $37.5 million wereand non-controlling shareholders held directly by$17.2 million.
As of December 31, 2023, the Company did not consolidate any of the Funds. As of December 31, 2022, the Company consolidated the Diamond Hill International Fund. The Company deconsolidated the Diamond Hill International Fund during the year ended December 31, 2023, as the Company’s ownership declined to less than 50%.
The components of net investment income (loss) are as follows: | | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| Realized gains (losses) | $ | 39,096 | | | $ | (118,408) | | | $ | 15,676,405 | |
| Change in unrealized | 15,690,012 | | | (24,082,672) | | | (2,352,649) | |
| Dividends | 7,517,393 | | | 4,193,792 | | | 3,221,448 | |
| | | | | |
| Other loss | (175,060) | | | (179,223) | | | (163,988) | |
| Investment income (loss), net | $ | 23,071,441 | | | $ | (20,186,511) | | | $ | 16,381,216 | |
Company-Sponsored Equity Method Investments
As of December 31, 2023, the Company’s equity method investments consisted of DHMF, the Diamond Hill International Fund, and $23.3the Diamond Hill Large Cap Concentrated Fund. The Company’s ownership percentage in each of these investments was 85%, 49%, and 47%, respectively. The Company’s ownership in DHMF, the Diamond Hill International Fund, and the Diamond Hill Large Cap Concentrated Fund includes $6.9 million wereof investments held by noncontrolling shareholders.in the Deferred Compensation Plans (as defined in Note 7).
As of December 31, 2022, the Company’s equity method investments consisted of DHMF and the Diamond Hill Large Cap Concentrated Fund, and the Company’s ownership percentage in each of these investments was 85% and 48%, respectively. The Company’s ownership in DHMF and the Diamond Hill Large Cap Concentrated Fund includes $3.8 million of investments from the Deferred Compensation Plans.
As of December 31, 2021, the Company’s only equity method investment was DHMF, which commenced operations on June 1, 2021. The Company’s ownership percentage in DHMF as of December 31, 2022 was 87%.
The following table includes the condensed summary financial information from the Company’s equity method investments as of December 31, 2023 and 2022, and for the years ended December 31, 2023, 2022, and 2021:
| | | | | | | | | | | | | | | | | |
| | | As of December 31, |
| | | 2023 | | 2022 |
| Total assets | | | $ | 162,145,182 | | | $ | 38,828,388 | |
| Total liabilities | | | 4,551,099 | | | 278,675 | |
| Net assets | | | 157,594,083 | | | 38,549,713 | |
| DHCM’s portion of net assets | | | $ | 84,530,289 | | | $ | 24,105,808 | |
| | | | | |
| For the Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| Investment income | $ | 1,349,183 | | | $ | 413,528 | | | $ | 106,440 | |
| Expenses | 460,670 | | | 134,478 | | | 37,820 | |
| Net realized gains | 311,950 | | | 378,476 | | | — | |
| Change in unrealized | 15,879,847 | | | (402,230) | | | 977,920 | |
| Net income | 17,080,310 | | | 255,296 | | | 1,046,540 | |
| DHCM’s portion of net income (loss) | $ | 9,728,056 | | | $ | (405,393) | | | $ | 914,855 | |
The Company’s investments at December 31, 2023 and 2022 include its interest in DHMF, an unconsolidated VIE, as the Company is not deemed the primary beneficiary. The Company’s maximum risk of loss related to its involvement with DHMF is limited to the carrying value of its investment which was $17.7 million and $13.1 million as of December 31, 2023 and 2022, respectively.
Note 4 Fair Value Measurements
The Company determines the fair value of its cash equivalents and certain investments using the following broad levels listed below:
Level 1 - Unadjusted quoted prices for identical instruments in active markets.
Level 2 - Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-driven valuations in which all significant inputs are observable.
Level 3 - Valuations derived from techniques in which significant inputs are unobservable. The Company does not value any investments using Level 3 inputs.
These levels are not necessarily an indication of the risk or liquidity associated with investments.
The following table summarizes investments that are recognized in the Company’s consolidated balance sheet using fair value measurements (excludes investments classified as equity method investments) determined based upon the differing levels as of December 31, 2023 and 2022:
| | | | | | | | | | | | | | |
| December 31, 2023 | Level 1 | Level 2 | Level 3 | Total |
| Cash equivalents | $ | 44,171,397 | | — | | — | | $ | 44,171,397 | |
| Fair value investments | | | | |
| Company-sponsored investments | 63,208,573 | | — | | — | | 63,208,573 | |
| | | | |
| December 31, 2022 | | | | |
| Cash equivalents | 60,412,001 | | — | | — | | 60,412,001 | |
| Fair value investments | | | | |
Securities held in Consolidated Funds(a) | 21,542,950 | | $ | 33,198,043 | | — | | 54,740,993 | |
| Company-sponsored investments | $ | 66,828,910 | | — | | — | | $ | 66,828,910 | |
(a) Of the securities held in the Consolidated Funds as of December 31, 2016, $42.6 million were held directly by2022, the Company directly held $37.5 million and $14.7 million werenon-controlling shareholders held by noncontrolling shareholders.$17.2 million.
As of December 31, 2017, our equity method investees consistedChanges to fair values of the Diamond Hill Research Opportunities Fund,investments are recorded in the Diamond Hill High Yield Fund, DHGF and DHIEF, and our ownership percentages in these funds were 26%Company’s consolidated statements of income as investment income (loss), 48%, 95%, and 30%, respectively. As of December 31, 2016, our equity method investees consisted of the Diamond Hill Mid Cap Fund, the Diamond Hill Research Opportunities Fund, the Diamond Hill High Yield Fund, and DHGF, and our ownership percentages in these funds were 33%, 27%, 20%, and 95%, respectively. The Company's equity method investments consist of cash, marketable equity securities and fixed income securities. The Company met the significant subsidiaries test for total equity method investments as of December 31, 2017 and is required to provide the summarized financial information for all equity method investments for all periods presented. The following table includes the condensed summary financial information from the Company's equity method investments as of December 31, 2017 and 2016 and for the years ended December 31, 2017, 2016 and 2015:net.
|
| | | | | | | | | | | |
| |
| | As of December 31, |
| | | | 2017 | | 2016 |
| Total assets | | | $ | 144,118,745 |
| | $ | 189,819,824 |
|
| Total liabilities | | | 38,009,765 |
| | 45,931,979 |
|
| Net assets | | | 106,108,980 |
| | 143,887,845 |
|
| DHCM's portion of net assets | | | 36,043,704 |
| | 41,338,046 |
|
| | | | | | |
| | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Investment income | $ | 2,944,836 |
| | $ | 3,272,972 |
| | $ | 792,691 |
|
| Expenses | 1,176,896 |
| | 1,409,896 |
| | 5,506 |
|
| Net realized gains | 4,432,850 |
| | 1,981,185 |
| | 1,219,565 |
|
| Net change in unrealized appreciation (depreciation) | 5,613,627 |
| | 10,458,073 |
| | (1,879,047 | ) |
| Net income | 11,814,417 |
| | 14,302,334 |
| | 127,703 |
|
| DHCM's portion of net income | 3,206,702 |
| | 4,392,636 |
| | 124,825 |
|
Note 4 5 Line of Credit
The Company has an uncommitteda committed Line of Credit Agreement (the "Credit Agreement"“Credit Agreement”) with a commercial bank that matures inon December of 2018 and12, 2024, which permits the Company to borrow up to $25.0 million. Borrowings under the Credit Agreement bear interest at a rate equal to LIBORthe Secured Overnight Financing Rate plus 1.50%1.10%. The Company has not borrowed under the Credit Agreement as of and for the years ended December 31, 2017 and 2016. No interest is payablepays a commitment fee on the unused portion of the Credit Agreement.
facility, accruing at a rate per annum of 0.10%.
The proceeds of the Credit Agreement may be used by the Company and its subsidiaries for ongoing working capital needs, to seed new and existing investment strategies, and for other general corporate purposes. The line of credit agreementCredit Agreement contains customary representations, warranties, and covenants that are customary for agreementscovenants.
The Company did not borrow under the Credit Agreement during the year ended December 31, 2023, and no borrowings were outstanding as of this type.December 31, 2023.
Note 5 6 Capital Stock
Common Shares
The CompanyDHIL has only one class of securities outstanding, common shares, no par value per share.
Authorization of Preferred Shares
The Company’sDHIL’s Amended and Restated Articles of Incorporation authorize the issuance of 1,000,000 “blank check” preferred shares with such designations, rights, and preferences as may be determined from time to time by the Company’s Board of Directors.Board. The Board of Directors is authorized, without shareholder approval, to issue preferred stockshares with dividend, liquidation, conversion, voting, or other rights, which could adversely affect the voting or other rights of the holders of the common shares. There were no shares of preferred stockshares issued or outstanding atas of either December 31, 20172023, or 2016.2022.
Note 6 7 Compensation Plans
Equity Incentive PlansShare-Based Payment Transactions
2014The Company maintains the shareholder-approved Diamond Hill Investment Group, Inc. 2022 Equity and Cash Incentive Plan
At (the “2022 Plan”), which authorizes the Company’s annual shareholder meeting on April 30, 2014, shareholders approvedissuance of 300,000 common shares of DHIL in various forms of equity awards. As of December 31, 2023, there were 234,952 common shares available for grants under the 2022 Plan. Previously, the Company issued equity awards under the Diamond Hill Investment Group, Inc. 2014 Equity and Cash Incentive Plan (“2014(the “2014 Plan”). The 2014 Plan is intended to facilitate the Company’s ability to attract and retain staff, provide additional incentive to employees and directors, and promote the success
2011 Equity and Cash Incentive Plan
There are no longer any DHIL common shares available for future awardsissuance under the 2011 Equity and Cash Incentive2014 Plan, (the "2011 Plan") , although awardscertain grants previously made under this planthe 2014 Plan remain issued and outstanding.
Restricted stock grants issued under the 2011 Plan, which vest over time, were recorded as deferred compensation in the equity section of the balance sheet on the grant date and then recognized as compensation expense based on the grant date price over the vesting period of the respective grant. Stock grants issued under the 2011 Plan were recorded as compensation expense based on the grant date price.
Share-Based Payment Transactions
The Company issues restricted stock units and restricted stock awards (collectively, "Restricted Stock") under the 2014 Plan. Restricted stock units represent shares which may be issued in the future, whereas restricted stock awards represent common shares issued and outstanding upon grant subject to vesting restrictions. The Company issues restricted stock grants that cliff vest after five years to all new Company employees upon hire and additional awards annually to key Company employees in the form of three-year graded vesting stock grants.
Restricted stock grants represent DHIL common shares issued and outstanding upon grant that remain subject to restrictions until specified vesting conditions are satisfied. The Company issues to all new Company employees upon hire restricted stock grants that cliff vest after five years.After the end of each year, the Company also issues to certain key employees restricted stock grants that vest ratably on an annual basis over three years.
Compensation and related costs, excluding deferred compensation expense (benefit) includes expenses related to restricted stock grants of $11.6 million, $10.5 million, and $7.2 million, for the years ended December 31, 2023, 2022, and 2021, respectively.
The following table represents a roll-forward of outstanding Restricted Stockrestricted stock and related activity for the year ended December 31, 2023:
| | | | | | | | | | | |
| Shares | | Weighted-Average
Grant Date Price
per Share |
| Outstanding Restricted Stock as of December 31, 2022 | 219,459 | | | $ | 165.62 | |
| Grants issued | 59,578 | | | 186.85 | |
| Grants vested | (81,745) | | | 183.64 | |
| Grants forfeited | (7,120) | | | 161.14 | |
| Outstanding Restricted Stock as of December 31, 2023 | 190,172 | | | $ | 164.69 | |
The weighted-average grant date price per share of restricted stock issued during the years ended December 31, 20172022 and 2016:
|
| | | | | | |
| | Shares | | Weighted-Average
Grant Date Price
per Share |
| Outstanding Restricted Stock as of December 31, 2015 | 329,356 |
| | $ | 108.46 |
|
| Grants issued | 38,900 |
| | 183.14 |
|
| Grants vested | (127,386 | ) | | 83.50 |
|
| Grants forfeited | (17,070 | ) | | 143.69 |
|
| Outstanding Restricted Stock as of December 31, 2016 | 223,800 |
| | $ | 132.96 |
|
| Grants issued | 41,350 |
| | 204.46 |
|
| Grants vested | (65,500 | ) | | 98.81 |
|
| Grants forfeited | (1,750 | ) | | 100.73 |
|
| Outstanding Restricted Stock as of December 31, 2017 | 197,900 |
| | $ | 165.60 |
|
Total deferred equity compensation related to unvested Restricted Stockrestricted stock grants was $19.1$15.4 million as of December 31, 2017. Compensation expense related to Restricted Stock grants is calculated based upon the fair market value of the common shares on the grant date. The Company's policy is to adjust compensation expense for forfeitures as they occur.2023. The recognition of compensation expense related to deferred compensation over the remaining vesting periods is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2024 | | 2025 | | 2026 | | 2027 | | 2028 | | Thereafter | | Total |
| $ | 8,956,756 | | | $ | 4,603,980 | | | $ | 1,299,220 | | | $ | 366,417 | | | $ | 165,854 | | | $ | 191 | | | $ | 15,392,418 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter | | Total |
| $ | 6,098,558 |
| | $ | 5,362,104 |
| | $ | 3,689,576 |
| | $ | 2,209,739 |
| | $ | 1,176,507 |
| | $ | 598,479 |
| | $ | 19,134,963 |
|
StockUnder the ESPP, eligible employees may purchase DHIL common shares at 85% of the fair market value on the last day of each offering period. Each offering period is approximately three months, which coincides with the Company’s fiscal quarters. During the year ended December 31, 2023, ESPP participants purchased 2,904 DHIL common shares for $0.4 million and the Company recorded $0.1 million of share-based payment expense related to these purchases. During the year ended December 31, 2022, ESPP participants purchased 3,392 DHIL common shares for $0.5 million and the Company recorded $0.1 million of share-based payment expense related to these purchases.
As of December 31, 2023, 89,426 DHIL common shares were reserved for future issuance through the ESPP.
Share Grant Transactions
The following table represents stockDHIL common shares issued as part of ourthe Company’s incentive compensation program during the years ended December 31, 2017, 2016,2023, 2022, and 2015:2021:
|
| | | | | | |
| | Shares Issued | | Grant Date Value |
| December 31, 2017 | 19,219 |
| | $ | 3,892,424 |
|
| December 31, 2016 | 21,940 |
| | 3,879,431 |
|
| December 31, 2015 | 27,192 |
| | 3,826,458 |
|
| | | | | | | | | | | |
| Shares Issued | | Grant Date Value |
| December 31, 2023 | — | | | — | |
| December 31, 2022 | 2,743 | | | $ | 487,870 | |
| December 31, 2021 | 3,681 | | | $ | 529,806 | |
401(k) Plan
The Company sponsors a 401(k) plan in which all Company employees are eligible to participate. EmployeesCompany employees may contribute a portion of their compensation subject to certain limits based on federal tax laws. The Company makes matchingmatches employee contributions of common shares of the Company with a value equal to 200 percent250.0% of the first six percent6.0% of an employee’s compensation contributed to the plan. The Company may settle the 401(k) plan matching contributions in cash or common shares of the Company. After June 1, 2023, the Company made all matching contributions in cash. Employees become fully vestedvest ratably in the matching contributions after six plan years of employment.over a five year period. The following table summarizes the Company’s expenses attributable to the 401(k) plan during the years ended December 31, 2017, 20162023, 2022 and 2015:2021:
|
| | | | | | |
| | Shares Issued | | Company Contribution |
| December 31, 2017 | 8,478 |
| | $ | 1,710,785 |
|
| December 31, 2016 | 9,466 |
| | 1,738,287 |
|
| December 31, 2015 | 9,336 |
| | 1,645,434 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Shares Issued | | Share Contributions | | Cash Contributions | | Total Company Contributions |
| December 31, 2023 | 99 | | | $ | 16,344 | | | $ | 3,067,630 | | | $ | 3,083,974 | |
| December 31, 2022 | 211 | | | 37,313 | | | 2,910,156 | | | 2,947,469 | |
| December 31, 2021 | 506 | | | $ | 87,667 | | | $ | 2,779,641 | | | $ | 2,867,308 | |
Deferred Compensation Plans
The Company offers two deferred compensation plans,Under the Diamond Hill Fixed Term Deferred Compensation Plan and the Diamond Hill Variable Term Deferred Compensation Plan (collectively the “Plans”). Under the Plans, participants may elect to voluntarily defer, for a minimum of five years (subject to an earlier distribution in the case of the participant’s death or disability or a change in control of DHIL), certain incentive compensation whichthat the Company then contributesmay contribute into the Deferred Compensation Plans. Each participant isParticipants are responsible for designating investment options for the assets they contribute, and the distribution paid to each participant reflects any gains or losses on the assets realized while in connection with the Deferred Compensation Plans. Assets held in the Deferred Compensation Plans are included in the Company’s investment portfolio, and the associated obligation to participants is included in deferred compensation liability. Assets held in the Plans are recorded at fair value. Deferred compensation liability was $20.5$36.1 million and $14.2$30.7 million atas of December 31, 20172023 and 2016,2022, respectively.
Note 7 8 Operating Leases
The Company currently leases office space of approximately 37,829 square feet at one location.
As of December 31, 2023 and December 31, 2022, the carrying value of this right-of-use asset, which is included in property and equipment, was approximately $0.6 million and $1.1 million, respectively, net of deferred rent on the consolidated balance sheets. As of December 31, 2023 and December 31, 2022, the carrying value of the lease liability was approximately $0.8 million and $1.4 million, respectively, which is included in accounts payable and accrued expenses on the consolidated balance sheets.
The following table summarizes the total lease and the related operating expenses for the years ended December 31, 2017, 20162023, 2022 and 2015:2021:
| | | | | | | | | | | | | | |
| For the year ended December 31, |
| 2023 | | 2022 | | 2021 |
| $ | 908,516 | | | $ | 918,496 | | | $ | 932,637 | |
|
| | | | | | | | | | |
| For the year ended December 31, |
| 2017 | | 2016 | | 2015 |
| $ | 936,008 |
| | $ | 882,231 |
| | $ | 928,440 |
|
The approximate future minimum lease payments under the operating lease are as follows:
| | | | | Future Minimum Lease Payments by Year |
| Total | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter |
| Future Minimum Lease Payments by Year | |
| 2024 | |
| 2024 | |
| 2024 | | | 2025 | | Thereafter | | Total |
| $ | 4,146,694 |
| | $ | 586,350 |
| | $ | 595,807 |
| | $ | 624,179 |
| | $ | 624,179 |
| | $ | 624,179 |
| | $ | 1,092,000 |
|
In addition to the above lease payments, the Company is also responsible for normal operating expenses of the property. SuchThese annual operating expenses were approximately $0.4 million in each of 2017, 20162023, 2022, and 2015.2021.
Note 8 9 Income Taxes
The provision for income taxes consists of:
The Tax Cuts and Jobs Act was passed on December 22, 2017. Among other federal tax law changes, for taxable years beginning after December 31, 2017, the new law establishes a flat corporate income tax rate of 21% to replace our current rate of 35% and eliminates the corporate alternative minimum tax. In accordance with FASB ASC 740, Income Taxes ("ASC 740"), the Company has recorded tax expense of $3.6 million resulting from the re-measurement of the Company's estimated net deferred tax assets as of December 31, 2017. | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2023 | | 2022 | | 2021 |
| Current federal income tax provision | $ | 9,974,451 | | | $ | 14,494,857 | | | $ | 20,987,801 | |
| Current state and local income tax provision | 2,731,661 | | | 4,119,580 | | | 6,472,120 | |
| Deferred income tax expense (benefit) | 2,783,768 | | | (4,526,654) | | | (1,410,106) | |
| Provision for income taxes | $ | 15,489,880 | | | $ | 14,087,783 | | | $ | 26,049,815 | |
The following table represents the Company's provision for income taxes: |
| | | | | | | | | | | |
| | As of December 31, |
| | 2017 | | 2016 | | 2015 |
| Current city income tax provision | $ | 1,463,669 |
| | $ | 1,321,675 |
| | $ | 1,245,285 |
|
| Current state income tax provision | 310,726 |
| | 642,598 |
| | 335,897 |
|
| Current federal income tax provision | 24,749,832 |
| | 24,234,050 |
| | 22,874,571 |
|
| Deferred federal income tax expense (benefit) | 2,893,063 |
| | 469,312 |
| | (3,547,088 | ) |
| Provision for income taxes | $ | 29,417,290 |
| | $ | 26,667,635 |
| | $ | 20,908,665 |
|
A reconciliation of income tax expense atreconciles the statutory federal income tax rate to the Company’s effective income tax expense is as follows:
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Income tax computed at statutory rate | $ | 28,356,636 |
| | $ | 25,641,618 |
| | $ | 20,294,107 |
|
Benefit attributable to redeemable noncontrolling interests(a) | (564,449 | ) | | (189,773 | ) | | — |
|
| City and state income taxes, net of federal benefit | 1,153,357 |
| | 1,276,777 |
| | 1,027,768 |
|
| Revaluation adjustment of net deferred tax assets | 3,557,039 |
| | — |
| | — |
|
| Excess tax benefits on vesting of Restricted Stock | (2,420,250 | ) | | — |
| | — |
|
| Income tax benefit from dividends paid on Restricted Stock | (418,583 | ) | | — |
| | — |
|
| Other | (246,460 | ) | | (60,987 | ) | | (413,210 | ) |
| Income tax expense | $ | 29,417,290 |
| | $ | 26,667,635 |
| | $ | 20,908,665 |
|
| | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | 2021 |
| Statutory U.S. federal income tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
| State and local income taxes, net of federal benefit | 4.7 | | | 4.7 | | | 4.8 | |
| Internal revenue code section 162 limitations | 1.3 | | | 1.5 | | | 0.9 | |
| Excess tax deficit on vesting of restricted stock | 0.3 | | | 0.1 | | | 0.1 | |
| Income tax benefit from dividends paid on restricted stock | (0.5) | | | (0.9) | | | (1.0) | |
| Other | — | | | (0.6) | | | 0.2 | |
| Unconsolidated effective income tax rate | 26.8 | % | | 25.8 | % | | 26.0 | % |
| Impact attributable to redeemable noncontrolling interest (a) | (0.4) | | | 1.8 | | | (0.4) | |
| Effective income tax rate | 26.4 | % | | 27.6 | % | | 25.6 | % |
(a) The provision for income taxes includes a benefitexpense (benefit) attributable to the fact that the Company'sCompany’s operations include the Consolidated Funds, which are not subject to federal income taxes. Accordingly, a portion of the Company'sCompany’s earnings are not subject to corporate tax levels.
Deferred income taxes and benefits arise from temporary differences between taxable income for financial statement and income tax return purposes. Net deferred tax assets consisted of the following atas of December 31, 20172023 and 2016:2022:
| | | | 2017 | | 2016 |
| 2023 | | | 2023 | | 2022 |
| Stock-based compensation | $ | 2,868,719 |
| | $ | 4,450,129 |
|
| Accrued compensation | 5,795,204 |
| | 7,355,744 |
|
| Unrealized gains | (2,260,673 | ) | | (1,802,708 | ) |
| Unrealized (gains) losses | |
| Property and equipment | (467,127 | ) | | (779,391 | ) |
| Other assets and liabilities | (92,419 | ) | | (487,007 | ) |
| Net deferred tax assets | $ | 5,843,704 |
| | $ | 8,736,767 |
|
The net temporary differences incurred to date will reverse in future periods as the Company generates taxable earnings. The Company believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets recorded. The Company records a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of December 31, 2017,2023, no valuation allowance was deemed necessary.
The Company’s common shares outstanding consist of all shares issued and outstanding, including unvested restricted shares. Basic and diluted EPS are calculated under the two-class method. Pursuant to the two-class method, the Company’s unvested Restricted Stock grants with nonforfeitable rights to dividends are considered participating securities. Dividends are paid on all common shares outstanding at the same rate. Accordingly, the Company has evaluated the impact of earnings per share of all participating securities under the two-class method, noting no impact on earnings per share. Restricted stock awards with forfeitable rights to dividends and restricted stock units are considered dilutive. The following table sets forth the computation for basic and diluted EPS and reconciliation between basic and diluted shares outstanding:
Additionally, in the normal course of business, the Company enters into agreements that contain a variety of representations and
None.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Information required by this Item 10 is incorporated herein by reference from the Company’s definitive proxy statement for its 20182024 annual meeting of shareholders, towhich will be filed with the SEC no later than 120 days after December 31, 2023, pursuant to Regulation 14A of the Exchange Act (the “2018“2024 Proxy Statement”), under the captions: “Section“Delinquent Section 16(a) Beneficial Ownership Reporting Compliance”Reports”, “Proposal 1 –- Election of Directors”, “Proposal 1 –- Election of Directors –- The Board of Directors and Committees”, “Proposal 1 –- Election of Directors –- Corporate Governance”, and “Proposal 1 –- Election of Directors –- Executive Officers and Compensation Information”Compensation”.
Information required by this Item 11 is incorporated herein by reference from the Company’s 20182024 Proxy Statement under the captions: “Proposal 1 –- Election of Directors—Directors - The Board of Directors and Committees”, “Proposal 1 –- Election of Directors –- Corporate Governance”, “Proposal 1 – Electionand “Executive Compensation” (excluding the information under the subheadings “Pay Versus Performance Table,” “Tabular List of Directors – Corporate Governance – Compensation Committee InterlocksImportant Financial Performance Measures” and Insider Participation”, “Proposal 1 – Election“Analysis of Directors – Executive Officers and Compensation Information”, and “Proposal 1 – Election of Directors – Compensation Committee Report”Information Presented in the Pay Versus Performance Table”).
The other information required by this Item 12 is incorporated herein by reference from the Company’s 20182024 Proxy Statement under the captions: “Security Ownership of Certain Beneficial Owners and Management” and “Proposal 1 – Election of Directors – Executive Officers and Compensation Information”.Compensation.”
Information required by this Item 13 is incorporated herein by reference from the Company’s 20182024 Proxy Statement under the caption: “Proposal 1 – Election of Directors – Director Independence” and “Proposal 1 – Election of Directors – Corporate Governance”.
Information required by this Item 14 is incorporated herein by reference from the Company’s 20182024 Proxy Statement under the caption: “Proposal 2 – Ratification of the Appointment of Independent Registered Public Accounting Firm”.
