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A Model Culture Makes This Diamond Shine

Diamond Hill has been stable while competition wobbles.

Andy Gogerty, 07/21/2009

While some publicly traded fund companies such as Janus JNS and AllianceBernstein AB have been through multiple changes in recent years, Diamond Hill Investment Group DHIL has been just the opposite--stable. The firm leverages the same investment philosophy across its fund lineup, and it has seen few, if any, departures from its investment staff. It also has been slow to launch new funds, only expanding its lineup when the managers believe they can successfully execute their strategy in a certain space. Even then, it's shown a contrarian streak: Back in 2000, it was one of the first companies to launch a long-short offering (Diamond Hill Long-Short DIAMX) when the market was focused on the seduction of technology and new-age Internet companies. Sticking to its philosophy of finding long-term values has been a successful decision for Diamond Hill. Its funds' long-term records rank among their categories' best.

Focusing on performance, even longer term, is always an easy talking point, but there's more to an investor's experience than just returns. That's why we monitor and evaluate fund companies' structures and actions to assess the likelihood of future and sustainable success. We look at all aspects of a fund company's decisions, homing in on changes in priorities, personnel, and product mixes that could indicate trouble--or success--down the road. In that light, Diamond Hill has consistently placed fund shareholder interests first, and we are confident the firm will continue to do so. Below is a state-of-the-union of Diamond Hill's corporate culture, including our rationale for maintaining its corporate-culture grade, part of its funds' overall Stewardship Grades, at an A.

Putting (Fund) Shareholders First
Diamond Hill Investment Group is a publicly traded fund company. That profile increases the risk of conflicts arising between Diamond Hill stockholders and fund shareholders. Stockholders typically want higher asset and fee levels, which generate more revenue, while fundholders want smaller asset bases and lower fee levels to increase the funds' chance of outperformance. To its credit, Diamond Hill has demonstrated a commitment to fund shareholders in a number of ways. For example, the firm previously closed Diamond Hill Small Cap DHSCX at a manageable size, and reopened the fund in September 2007 but with a higher minimum investment to keep size under control. That's quite important given that a swelling asset base can wreak havoc on a manager's investing style, threatening performance in the process. More generally, it indicates that the firm is willing to take steps to protect the interests of long-term fund shareholders, even if it means placing fund performance before asset gathering in the pecking order.

Refreshing Transparency
That commitment is further evident in the public company's annual reports. CEO Ric Dillon stated in multiple annual reports to stockholders that the firm's "primary corporate objective is to meet [its] fiduciary duty to clients." Dillon further stated that growth will come if they attend to long-term investment success. Other communications with fund shareholders also emphasize the long haul and don't tout the firm's short-term records in an attempt to attract performance chasers. Shareholder letters often warn that hot returns aren't likely to continue and urge shareholders to maintain a long-term focus. The firm's Web site continues this trend of transparency and provides an abbreviated version of Diamond Hill's valuation model so that investors can estimate the intrinsic values of individual stocks, giving fundholders a better idea of the firm's management philosophy.

True, the firm is not a low-cost provider like Vanguard, but it has passed along economies of scale to shareholders by gradually reducing expense ratios on all its funds. Moreover, Diamond Hill does not pay higher trading commissions in exchange for research reports or other services, a practice known in the industry as "soft dollars." In sum, while certain conflicts of interests exist here, we're heartened by the firm's behavior. Judging by its actions, Diamond Hill is a firm that takes its responsibilities to fund shareholders to heart.

Andy Gogerty is a mutual fund analyst with Morningstar.

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