The Company, an Ohio corporation organized in April 1990, derives its consolidated
revenue and net income from investment advisory and fund administration services
provided by its subsidiaries Diamond Hill Capital Management, Inc. (“DHCM”),
Beacon Hill Fund Services, Inc. (“BHFS”), and BHIL Distributors,
Inc. (“BHIL”). BHFS and BHIL collectively operate as "Beacon
Hill". DHCM is a registered investment adviser under the Investment Advisers
Act of 1940. DHCM sponsors, distributes, and provides investment advisory and
related services to U.S. and foreign clients through Diamond Hill Funds (the
"Funds"), institutional accounts, an exchange traded fund, and private
investment funds (generally known as “hedge funds”). Beacon Hill
provides fund administration and statutory underwriting services to U.S. and
foreign clients, including the Funds.
The Company’s primary objective is to fulfill our fiduciary duty to our
clients. Our secondary objective is to grow the intrinsic value of the Company
in order to achieve an adequate long-term return for our shareholders.
Investment Philosophy
We believe that a company’s intrinsic value is independent of its stock
price. We also believe competitive long-term returns can be achieved by buying
(shorting) companies when the current market price is at a discount (premium)
to our estimate of intrinsic value, based upon a discounted cash flow methodology.
The following are the guiding principles for our philosophy:
Treat every investment as a partial ownership interest in that company.
Investing is most intelligent when it is viewed through the lens of an owner.
Always invest with a margin of safety.
Our discipline is to purchase (short) securities at a sufficient discount (premium)
to our estimate of intrinsic value. We estimate the intrinsic value of the company
independent of the current stock market price then compare our estimate to the
price to determine if an opportunity exists. When we successfully identify securities
trading below (above) our estimate of intrinsic value, it increases the potential
reward and serves as the most effective risk control.
Possess a long-term investment temperament.
In the short term, emotion as much as economic fundamentals drives market prices.
Over time, the economic performance of the company and the price paid, versus
the market, will determine investment return.
Recognize that market price and intrinsic value tend to converge over a reasonable
period of time.
Investment opportunity lies in the ability to buy (or short), when the current
market price does not reflect a company’s intrinsic value, and to sell
(or cover) when price and value converge.
DHCM’s 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 to determine whether there is
a discrepancy between the current market price and DHCM’s estimate of
intrinsic value. In order to forecast the amount and timing of cash flows, the
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
to the analysis of fixed income securities.
Only securities selling at a discount (premium) to intrinsic value will be purchased
(sold short). A portfolio manager assigns the highest weights to the highest
conviction names. Within certain diversification constraints, a portfolio manager
is willing to take outsized positions in the highest conviction ideas and we
will often have no exposure to industries without attractive intrinsic value
opportunities. A stock will be sold (or covered) if its price reaches DHCM’s
estimate of intrinsic value, if fundamentals deteriorate, if a more attractive
opportunity is identified, or if the holding reaches a specified limit as a
percent of the portfolio.
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 business appraisal approach
to investing. Furthermore, DHCM believes that investing in securities whose
market prices are significantly below its estimate of intrinsic value (or selling
short securities whose market prices are above its estimate of intrinsic value)
is a reliable method to achieve above average relative returns, as well as mitigate
risk.
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