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Table of Contents

 
United States
Securities and Exchange Commission
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
For the fiscal year ended December 31, 2019

or

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
 
 

dhillogoa46.jpg

DIAMOND HILL INVESTMENT GROUP, INC.

(Exact name of registrant as specified in its charter)
 
 
Ohio
 
65-0190407
(State of
incorporation)
 
(I.R.S. Employer
Identification No.)
325 John H. McConnell Blvd, Suite 200, Columbus, Ohio 43215
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (614) 255-3333

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
Common shares, no par value
 
DHIL
 
The NASDAQ Stock Market

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  
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  
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      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes      No  
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 growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
  
Accelerated filer
 
 
 
 
 
 
 
 
Non-accelerated filer
 
  
Smaller reporting company
 
 
 
 
 
 
 
 
 
 
 
 
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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes      No  
The aggregate market value of the registrant’s common shares (the only common equity of the registrant) held by non-affiliates of the registrant, based on the closing price of $141.72 on June 30, 2019, on the NASDAQ Global Select Market was $468,216,662. 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, as of February 27, 2020, is 3,289,865 shares.
Documents Incorporated by Reference
Portions of the registrant’s definitive Proxy Statement for the 2020 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 Annual Report on Form 10-K.
 



Table of Contents

Diamond Hill Investment Group, Inc.
Form 10-K
For the Fiscal Year Ended December 31, 2019
Index
 
Required Information
Page
 
 
 
 
 
 
 
 

2

Table of Contents

PART I
Item 1.
Business
Forward-Looking Statements
Throughout this Annual Report on Form 10-K and the documents incorporated herein by reference, Diamond Hill Investment Group, Inc. (“Diamond Hill”), may make forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Exchange Act”), and Section 21E of the Securities Exchange Act of 1934, as amended, including, but not limited to, statements 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 “believe,” “expect,” “anticipate,” “target,” “project,” “estimate,” “would,” “will,” “continue,” “should,” “hope,” “seek,” “plan,” “intend,” variations of such words and similar expressions identify such forward-looking statements, which speak only as of the date made. While we believe that the assumptions underlying our forward-looking statements are reasonable, investors are cautioned that any of the assumptions could prove to be inaccurate and, accordingly, our actual results and experiences could differ materially from the anticipated results or other expectations expressed in our forward-looking statements.
Factors that could cause such actual results or experiences to differ from results discussed in the forward-looking statements include, but are not limited to: (i) any reduction in our assets under management (“AUM”); (ii) withdrawal, renegotiation or termination of investment advisory agreements; (iii) damage to our reputation; (iv) failure to comply with investment guidelines or other contractual requirements; (v) challenges from the competition we face in our business; (vi) adverse regulatory and legal developments; (vii) unfavorable changes in tax laws or limitations; (viii) interruptions in or failure to provide critical technological service by us or third parties; (iv) adverse civil litigation and government investigations or proceedings; (x) risk of loss on our investments; (xi) lack of sufficient capital on satisfactory terms; (xii) losses or costs not covered by insurance; (xiii) impairment of goodwill or intangible assets; (xiv) a decline in the performance of our products; (xv) changes in interest rates; (xvi) changes in national and local economic and political conditions; (xvii) the continuing economic uncertainty in various parts of the world; and other risks identified from time-to-time in other public documents on file with the U. S. Securities and Exchange Commission (“SEC”), including those discussed below in Item 1A.
We do not undertake or plan to update or revise any such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections, or other circumstances occurring after the date of this Annual Report on Form 10-K, even if such results, changes or circumstances make it clear that any forward-looking information will not be realized. If there are any future public statements or disclosures by us which modify or impact any of the forward-looking statements contained in or accompanying this Annual Report on Form 10-K, such statements or disclosures will be deemed to modify or supersede such statements in this Annual Report on Form 10-K. Throughout this Annual Report on Form 10-K, when we use the terms the “Company,” “management,” “we,” “us,” and “our,” we mean Diamond Hill and its subsidiaries.
Overview
Diamond Hill, an Ohio corporation organized in April 1990, 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. (“DHCM”). DHCM is a registered investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). DHCM sponsors, distributes, and provides investment advisory and related services to clients through Diamond Hill Funds (the “Funds”), sub-advised mutual funds, and separately managed accounts.
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.

3

Table of Contents

Investment Advisory Activities
Clients
The Company provides investment advisory services to a broad range of clients, including corporations, mutual funds, retirement plans, public pension funds, endowments, foundations, financial institutions and high net worth individuals. We strive to expand our client base by attracting new clients and earning additional business from existing clients.
Investment Philosophy
We believe intrinsic value is independent of market price and that competitive long-term returns can be achieved by identifying meaningful differences between the two. We believe we can identify those market opportunities with a bottom-up, intrinsic value-focused approach to active investment management. As a result, our investment strategy is driven by individual security decisions rather than by a macro-economic focus.
Investment Process
DHCM’s equity investment process begins with fundamental research focusing on estimating a company’s intrinsic value. Bottom-up analysis, described in further detail below, is of primary importance in estimating the intrinsic value of an individual company. Our research analysts also evaluate each company within the context of sector and industry secular trends. A five-year discounted cash flow analysis is the primary methodology used to determine whether there is a discrepancy between the current market price and DHCM’s estimate of intrinsic value. We will invest when we believe we can make informed judgments about, and estimates of, those cash flows and when our estimate of intrinsic value provides a margin of safety relative to the current market price. The key factors in determining the intrinsic value are normalized earnings and earnings growth rate, payout ratio and dividends, terminal earnings multiple, and required rate of return. We assign the highest portfolio weights where we have the highest conviction. Within stated diversification constraints, we are willing to take outsized positions in our highest conviction ideas. Benchmark weights are not a consideration.
DHCM also applies a value philosophy and process to the analysis of fixed income securities. For our Short Duration Total Return and Core Bond strategies, our investment process is driven by security selection, sector allocation, yield curve positioning, and duration management in concert with overall portfolio management. We seek to generate excess return through the selection of undervalued securities and spread sectors that offer incremental yield and total return in comparison to the index. The hallmark of our process is the selection of individual issues with an emphasis on identifying undervalued securities. Individual securities are selected following a risk/reward evaluation of interest rate and credit risk, and an examination of the complex structure of the security. We only purchase those securities that we identify as undervalued and offer a strong total return profile relative to similar securities.
For our Corporate Credit and High Yield strategies, in addition to the analysis by the portfolio managers, we leverage the company and industry analysis conducted by our research team to identify attractive corporate bonds. We seek to invest in bonds of companies with improving return on invested capital and stable or improving competitive positions. Our research team’s company analysis focuses on the fundamental economic drivers of the business and helps assess whether there is adequate financial strength and flexibility to meet ongoing commitments. The research team also considers debt instruments as part of their analysis. After the credit research is complete, our portfolio managers determine whether a security is attractive on a yield basis relative to asset and interest coverage and relative to other securities with comparable risk. We will only invest in the bonds of a company that we can properly analyze and value.
DHCM believes that many investors’ short-term focus hinders their long-term results, which creates market inefficiencies and therefore opportunities. In addition, the size and complexity of the fixed income markets also creates inefficiencies. We believe 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 Fees
The Company’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. Revenues depend on the total value and composition of AUM. Accordingly, net cash flows from clients, market fluctuations in client portfolios, and the composition of AUM impact our revenues and results of operations. We also have certain agreements which allow us to earn variable rate fees in the event that investment returns exceed targeted amounts during a measurement period.

4

Table of Contents

Investment Strategies
The Company offers several traditional and alternative investment strategies, each of which is based on the same intrinsic value philosophy. As of December 31, 2019, we offered the following representative investment strategies to our clients:
1.
Small Cap - Pursues long-term capital appreciation by investing in a portfolio of primarily small capitalization U.S. equity securities.
2.
Small-Mid Cap - Pursues long-term capital appreciation by investing in a portfolio of primarily small and medium capitalization U.S. equity securities.
3.
Mid Cap - Pursues long-term capital appreciation by investing in a portfolio of primarily medium capitalization U.S. equity securities.
4.
Large Cap - Pursues long-term capital appreciation by investing in a portfolio of primarily large capitalization U.S. equity securities.
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.
6.
Global - Pursues long-term capital appreciation by investing in U.S. and non-U.S. equity securities across a broad range of market capitalizations including up to 20% exposure to emerging markets.
7.
International - Pursues long-term capital appreciation by investing primarily in non-U.S. equity securities across a broad range of market capitalizations including up to 30% exposure to emerging markets.
8.
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.
9.
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 40% in international equity securities and up to 20% in fixed income securities.
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.
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.
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.
13.
High Yield - Pursues high current income with the opportunity for capital appreciation by investing primarily in below-investment grade corporate bonds.
Investment Results
The Company believes that one of the most important outcomes we provide our clients is excellent investment returns 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. As of December 31, 2019, the since-inception returns for most of our strategies exceeded their respective benchmark returns.


5

Table of Contents

The following is a summary of the investment returns for each of our Funds as of December 31, 2019, relative to its respective passive benchmark.
 
 

As of December 31, 2019
 
Inception
 
1 Year
 
3 Year
 
5 Year
 
10 Year
 
Since Inception
Diamond Hill Small Cap Fund
12/29/2000
 
21.75
%
 
4.76
%
 
4.90
%
 
9.26
%
 
10.01
%
Russell 2000 Index

 
25.52
%
 
8.59
%
 
8.23
%
 
11.83
%
 
8.18
%
Diamond Hill Small-Mid Cap Fund
12/30/2005
 
27.74
%
 
6.66
%
 
7.76
%
 
11.74
%
 
8.91
%
Russell 2500 Index

 
27.77
%
 
10.33
%
 
8.93
%
 
12.58
%
 
8.84
%
Diamond Hill Mid Cap Fund
12/31/2013
 
25.82
%
 
7.62
%
 
8.29
%
 
 NA

 
8.22
%
Russell Midcap Index
 
 
30.54
%
 
12.06
%
 
9.33
%
 
 NA

 
9.97
%
Diamond Hill Large Cap Fund
6/29/2001
 
32.18
%
 
12.84
%
 
10.31
%
 
12.09
%
 
9.00
%
Russell 1000 Index

 
31.43
%
 
15.05
%
 
11.48
%
 
13.54
%
 
7.71
%
Diamond Hill All Cap Select Fund
12/30/2005
 
30.77
%
 
11.45
%
 
8.45
%
 
11.35
%
 
8.61
%
Russell 3000 Index

 
31.02
%
 
14.57
%
 
11.24
%
 
13.42
%
 
9.24
%
Diamond Hill Long-Short Fund
6/30/2000
 
23.11
%
 
6.65
%
 
5.74
%
 
7.01
%
 
6.93
%
60% Russell 1000 Index / 40% ICE BofA U.S. T-Bill 0-3 Mo Index

 
19.15
%
 
9.69
%
 
7.37
%
 
8.37
%
 
4.74
%
Diamond Hill Research Opportunities Fund
3/31/2009
 
25.51
%
 
7.42
%
 
5.29
%
 
8.90
%
 
11.78
%
75% Russell 3000 Index / 25% ICE BofA U.S. T-Bill 0-3 Mo Index
 
 
23.38
%
 
11.36
%
 
8.75
%
 
10.23
%
 
12.33
%
Diamond Hill Global Fund
12/31/2013
 
30.34
%
 
12.97
%
 
8.51
%
 
 NA

 
7.53
%
Morningstar Global Markets Index
 
 
26.24
%
 
12.14%

 
8.37%

 
 NA

 
7.63
%
Diamond Hill International Fund
12/30/2016
 
23.56
%
 
12.99
%
 
NA

 
 NA

 
12.99
%
Morningstar Global Markets ex-U.S. Index

 
21.57
%
 
9.94
%
 
NA

 
 NA

 
9.94
%
Diamond Hill Short Duration Total Return Fund
7/5/2016
 
4.85
%
 
4.12%

 
 NA

 
 NA

 
3.90
%
Bloomberg Barclays U.S. 1-3 Yr. Gov./Credit Index
 
 
4.03
%
 
2.15%

 
 NA

 
 NA

 
1.71
%
Diamond Hill Core Bond Fund
7/5/2016
 
7.93
%
 
4.53
%
 
 NA

 
 NA

 
3.24
%
Bloomberg Barclays U.S. Aggregate Index
 
 
8.72
%
 
4.03
%
 
 NA

 
 NA

 
2.49
%
Diamond Hill Corporate Credit Fund
9/30/2002
 
13.20
%
 
7.11
%
 
6.95
%
 
7.12
%
 
7.22
%
ICE BofA U.S. Corporate & High Yield Index

 
14.28
%
 
6.03
%
 
4.89
%
 
5.97
%
 
6.19
%
Diamond Hill High Yield Fund
12/4/2014
 
15.44
%
 
8.82
%
 
8.18
%
 
 NA

 
8.12
%
ICE BofA U.S. High Yield Index
 
 
14.41
%
 
6.32
%
 
6.13
%
 
 NA

 
5.91
%
________________________
-
Fund returns are Class I shares net of fees
-
Index returns do not reflect any fees
Assets Under Management
The following tables show AUM by product and investment objective, as well as net client cash flows, for the past five years ended December 31, 2019:
 
Assets Under Management
As of December 31,
(in millions)
2019
 
2018
 
2017
 
2016
 
2015
Proprietary funds
$
16,148

 
$
13,440

 
$
15,974

 
$
13,618

 
$
11,505

Sub-advised funds
2,029

 
1,358

 
1,518

 
1,445

 
665

Separately managed accounts
5,222

 
4,310

 
4,825

 
4,318

 
4,671

Total AUM
$
23,399

 
$
19,108

 
$
22,317

 
$
19,381

 
$
16,841

 

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Assets Under Management
by Investment Strategy
As of December 31,
(in millions)
2019
 
2018
 
2017
 
2016
 
2015
Small Cap
$
795

 
$
1,048

 
$
1,525

 
$
1,843

 
$
1,703

Small-Mid Cap
3,243

 
2,770

 
3,528

 
3,329

 
2,070

Mid Cap
569

 
143

 
130

 
59

 
18

Large Cap
12,344

 
9,637

 
10,867

 
8,497

 
7,547

All Cap Select
528

 
432

 
444

 
402

 
544

Long-Short
3,605

 
3,767

 
4,980

 
4,613

 
4,597

Global/International
35

 
18

 
6

 
2

 
1

Total Equity
21,119

 
17,815

 
21,480

 
18,745

 
16,480

Short Duration Fixed Income
809

 
579

 
313

 
197

 

Core Fixed Income
300

 
55

 
44

 
40

 

Long Duration Fixed Income
52

 
52

 

 

 

Corporate Credit
1,147

 
757

 
668

 
549

 
351

High Yield
135

 
54

 
31

 
32

 
10

Total Fixed Income
2,443

 
1,497

 
1,056

 
818

 
361

Total Equity and Fixed Income
23,562

 
19,312

 
22,536

 
19,563

 
16,841

  (Less: Investments in affiliated funds)(a)
(163
)
 
(204
)
 
(219
)
 
(182
)
 

Total AUM
$
23,399

 
$
19,108

 
$
22,317

 
$
19,381

 
$
16,841

(a) Certain of the Funds own shares of the Diamond Hill Short Duration Total Return Fund. The Company reduces its total AUM by these investments held in this affiliated fund.

 
Change in Assets Under Management
For the Year Ended December 31,
(in millions)
2019
 
2018
 
2017
 
2016
 
2015
AUM at beginning of the year
$
19,108

 
$
22,317

 
$
19,381

 
$
16,841

 
$
15,656

Net cash inflows (outflows)
 
 
 
 
 
 
 
 
 
proprietary funds
(499
)
 
(978
)
 
843

 
548

 
1,916

sub-advised funds
216

 
(25
)
 
(164
)
 
639

 
(6
)
separately managed accounts
(394
)
 
(99
)
 
(254
)
 
(1,023
)
 
(443
)

(677
)
 
(1,102
)
 
425

 
164

 
1,467

Net market appreciation/(depreciation) and income
4,968

 
(2,107
)
 
2,511

 
2,376

 
(282
)
Increase (decrease) during the year
4,291

 
(3,209
)
 
2,936

 
2,540

 
1,185

AUM at end of the year
$
23,399

 
$
19,108

 
$
22,317

 
$
19,381

 
$
16,841

Capacity
The Company’s primary goal is to fulfill our fiduciary duty to clients. We understand that our ability to retain and grow AUM as a firm has been, and will be, driven primarily by delivering attractive long-term investment results to our clients. In the event we determine that the size of one of our strategies hinders our ability to add value over a passive alternative, we close that strategy to new clients, which impacts our ability to grow AUM. We have prioritized, and will continue to prioritize, investment results over asset accumulation. Currently, our Small-Mid Cap strategy is closed to new investors.
We estimate capacity of $25 - 35 billion for our existing domestic equity strategies, at least $10 billion for our International and Global strategies and at least $40 billion for our existing fixed income strategies.  Determining our AUM 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 across strategies.  Our firm level capacity could increase in the event we develop new products or strategies.

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Distribution Channels
The Company’s investment advisory services are distributed through multiple channels. Below is a summary of our AUM by distribution channel for the five years ended December 31, 2019:
 
AUM by Distribution Channel
As of December 31,
(in millions)
2019
 
2018
 
2017
 
2016
 
2015
Proprietary funds:
 
 
 
 
 
 
 
 
 
Registered investment advisor
$
3,603

 
$
3,243

 
$
4,010

 
$
3,508

 
$
2,723

Independent broker-dealer
3,563

 
2,900

 
3,581

 
2,922

 
2,329

Wirehouse
3,026

 
2,319

 
2,660

 
2,011

 
1,963

Bank Trust
2,907

 
2,672

 
3,456

 
3,175

 
2,735

Defined contribution
2,723

 
1,904

 
1,840

 
1,535

 
1,218

Other
326

 
402

 
427

 
467

 
537

Total proprietary funds
16,148

 
13,440

 
15,974

 
13,618

 
11,505

Sub-advised funds
2,029

 
1,358

 
1,518

 
1,445

 
665

Separately managed accounts:
 
 
 
 
 
 
 
 
 
Institutional consultant
2,397

 
2,122

 
2,357

 
2,074

 
2,370

Financial intermediary
1,777

 
1,506

 
1,691

 
1,358

 
1,474

Direct
1,048

 
682

 
777

 
886

 
827

Total separately managed accounts
5,222

 
4,310

 
4,825

 
4,318

 
4,671

Total AUM
$
23,399

 
$
19,108

 
$
22,317

 
$
19,381

 
$
16,841

Growth Strategy
The Company’s growth strategy centers around creating a client experience that enables investors to have better outcomes over the long-term. This includes generating strong investment performance as well as providing exceptional service. We believe finding the right clients who share our long-term outlook will contribute to better outcomes.
Our approach to growth begins with our teams working with professional buyers (consultants and national accounts). We believe having strong relationships with these gatekeepers allows greater access to our strategies as well as efficient and scalable growth. We have increased our business development professionals working with financial advisors. We identify advisors across the Registered Investment Advisor (“RIA”), Wirehouse, Independent Broker-Dealer (“IBD”) and Bank Trust channels who have broad access to our full suite of strategies and align with our philosophy and time horizon. Today, this results in significant commitment to the RIA and Bank Trust channels.
In addition to our focus on serving the consultant community, we concentrate our service and future partnership opportunities in the institutional channel with foundations, endowments, defined benefit pension plans, trusts, corporations, state and local governments. As our fixed income and international strategies mature, we will continue to increase our alignment and growth prospects in the institutional channel.
We have taken additional steps to integrate custom communications into the overall client experience. We have increased our content marketing efforts to ensure we can communicate to all clients across all channels. We believe this will be crucial for client satisfaction, future growth, retention and operational efficiency.
Fund Administration Activities
The Company provides fund administration services to the Funds. Fund administration services are broadly defined in our administration agreements with the Funds as portfolio and regulatory compliance, treasury and financial oversight, oversight of back-office service providers such as the custodian, fund accountant, and transfer agent, and general business management and governance of the mutual fund complex.

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Competition
Competition in the area of investment management is intense, and our competitors include investment management firms, broker-dealers, banks and insurance companies, some of whom offer various investment alternatives, including passive index strategies. Many competitors are better known than the Company, offer a broader range of investment products and have more offices, employees and business development representatives. We compete primarily on the basis of philosophy, performance and client service.
Regulation
The Company and our business are subject to various federal, state and non-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. If an adviser fails to comply with these laws and regulations, agencies that regulate investment advisers have broad administrative powers, including the power to limit, restrict or prohibit an investment adviser from carrying on its business. Possible sanctions that may be imposed 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, and other registrations, censures and fines.
DHCM is registered with the Securities and Exchange Commission (“SEC”) under 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 of the Funds are registered with the SEC under the Investment Company Act of 1940, as amended, and are required to make notice filings with all states where the Funds are offered for sale. Virtually all aspects of our investment advisory and fund administration business are subject to various federal and state laws and regulations.
DHCM is a “fiduciary” under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), with respect to benefit plan clients and, therefore, is subject to ERISA regulations. ERISA and applicable provisions of the Internal Revenue Code 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’s trading activities for client accounts are regulated under the Exchange Act, including laws governing trading on inside information, market manipulation and a broad number of trading requirements (e.g., volume limitations, reporting obligations) and market regulation policies in the United States.
The preceding descriptions of the regulatory and statutory provisions applicable to us are not complete and are qualified in their entirety by reference to their respective statutory or regulatory provisions. Failure to comply with these requirements could have a material adverse effect on our business.
Contractual Relationships with the Funds
The Company is highly dependent on our contractual relationships with the Funds. If any of our advisory or administration agreements with the Funds were terminated, not renewed, or amended to reduce fees, we would be materially and adversely affected. We generated approximately 77%, 79% and 80% of our 2019, 2018 and 2017 revenues, respectively, from our advisory and administrative contracts with the Funds. We believe we have a strong relationship with the Funds and their board of trustees, and we have no reason to believe that these advisory or administration contracts will not be renewed in the future; however, there is no assurance that the Funds will choose to continue their relationships with the Company. Please see Item 1A for risk factors regarding this relationship.
Employees
As of December 31, 2019, the Company employed 129 full-time equivalent employees. As of December 31, 2018, the number of full-time equivalent employees was 125. We believe we have a strong relationship with our employees. Our employee count has grown year-over-year and we expect that general trend to continue.
SEC Filings
The Company maintains an Internet website at www.diamond-hill.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports that we file or furnish from time-to-time

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pursuant to Section 13(a) or 15(d) of the Exchange Act, are made available free of charge, on or through our website, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. These filings are also available on the Commission’s web-site at http://www.sec.gov free of charge.
ITEM 1A.
Risk Factors
Our future results of operations, financial condition, and liquidity, and the market price of our common shares are subject to various risks, including those mentioned below and those that are discussed from time-to-time in our other periodic filings with the SEC. Investors should carefully consider these risks, along with the other information contained in this Annual Report on Form 10-K, before making an investment decision regarding our common shares. There may be additional risks of which we are currently unaware, or which we currently consider immaterial. The occurrence of any of these risks could have a material adverse effect on our financial condition, results of operations, and liquidity, and the value of our common shares. Please see “Forward Looking Statements” within 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.
Poor investment results or adverse reviews of our products could affect our ability to attract new clients or reduce the amount of assets under management, potentially negatively impacting revenue and net income.
If we fail to deliver acceptable investment results for our clients, both in the short and long term, we could experience diminished investor interest and a decreased level of AUM. Adverse opinions of the funds that we advise published by third parties, including rating agencies and industry analysts, could also decrease our AUM and our revenues.
Investment funds 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 advise receives an adverse report, it could negatively influence the amount of money invested into the fund and increase withdrawals from the fund reducing our AUM and our revenue.
Our success depends on our key personnel, and our financial performance could be negatively affected by the loss of their services.
Our 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 face significant competition for qualified employees. Other than our Chief Executive Officer, our employees do not have employment contracts and generally can terminate their employment at any time. We may not be able to retain or replace key personnel. In order to retain or replace our key personnel, we may be required to increase compensation, which would decrease net income. The loss of key personnel could damage our 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 our revenues and net income.
Our AUM, which impacts revenue, is subject to significant fluctuations.
A large majority of our 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 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.
Our investment results and/or the growth in our AUM may be constrained if appropriate investment opportunities are not available or if we close certain of our portfolios to new investors.
Our ability to deliver strong investment results depends in large part on our ability to identify appropriate investment opportunities in which to invest client assets. If we are unable to identify sufficient investment opportunities for existing and new client assets on a timely basis, our 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 our AUM increases rapidly. In addition, if we determine that sufficient investment opportunities are not available for a portfolio strategy, or we believe that it is necessary in order to continue to produce attractive returns from a portfolio, we will consider closing the portfolio to new investors. As of December 31, 2019, we have closed one investment strategy to new investors. If we misjudge the point at which it would be optimal to close a portfolio, the investment results of the portfolio could be negatively impacted.

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Our investment approach may underperform other investment approaches during certain market conditions.
Our investment strategies are best suited for investors with long-term investment horizons.  Our investment strategies may not perform well during certain periods of time, including during periods when the market 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 our business.
Our investment products compete against a number of investment products and services from:
asset management firms;
mutual fund companies;
commercial banks and thrift institutions;
insurance companies;
exchange traded funds;
hedge funds; and
brokerage and investment banking firms.
Many of our 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 compete with other providers of investment services primarily based upon our philosophy, performance and client service. Some institutions have a broad array of products and distribution channels that make it more difficult for us to compete with them. If current or potential customers decide to use one of our competitors, we could face a significant decline in market share, AUM, revenues, and net income. If we are required to lower our fees in order to remain competitive, our net income could be significantly reduced because some of our expenses are fixed, especially over shorter periods of time, and our 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, our AUM may be negatively impacted.
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 we will be able to maintain our current fee structure. As a result, a shift in our AUM from higher to lower fee generating clients and strategies would result in a decrease in profitability even if our AUM increases or remains unchanged.
The loss of access to or increased fees required by third-party distribution sources to market our portfolios and access our client base could adversely affect our results of operations.
Our ability to attract additional AUM is dependent on our relationship with third-party financial intermediaries. We compensate 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 us for reasonable terms, or at all. If such access is restricted or eliminated, it could have an adverse effect on our 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 our access to those client bases while paying them could adversely affect our profitability.
A significant portion of the Company’s revenues are based on advisory and administrative agreements with the Funds that are subject to termination without cause and on short notice.
The Company is highly dependent on our contractual relationships with the Funds. If our advisory or administration agreements with the Funds were terminated, not renewed, or amended to reduce fees, we would be materially and adversely affected. Generally, these agreements are terminable by either party upon 60 days’ written notice without penalty. The agreements are subject to annual approval by either (i) the board of trustees of the Funds or (ii) a vote of the majority of the outstanding voting securities of each Fund. The agreements automatically terminate in the event of their assignment by either

11

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the Company or the Fund. We generated approximately 77%, 79%, and 80% of our 2019, 2018 and 2017 revenues, respectively, from our advisory and administrative contracts with the Funds, including 24%, 22%, and 13% from the advisory contracts with the Diamond Hill Long-Short Fund, the Diamond Hill Large Cap Fund, and the Diamond Hill Small-Mid Cap Fund, respectively, during 2019. The loss of any of the Diamond Hill Long-Short Fund, the Diamond Hill Large Cap Fund, or the Diamond Hill Small-Mid Cap Fund contracts would have a material adverse effect on the Company. We believe we have a strong relationship with the Funds and their boards of trustees, and we have no reason to believe that these advisory or administration contracts will not be renewed in the future; however, there can be no assurance that the Funds will choose to continue their relationships with us.
Our investment income and asset levels may be negatively impacted by fluctuations in our investment portfolio.
We currently 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 by 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 impact 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 taken or implement changes in tax policy, which may result in the assessment of additional taxes. We regularly assess 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.
Unauthorized disclosure of sensitive or confidential client or customer information, whether through a breach of our computer systems or otherwise, or other breaches in the security of our systems could severely harm our business.
As part of our business, we collect, process and transmit sensitive and confidential information about our clients and employees, as well as proprietary information about our business. We have policies and procedures pursuant to which we take numerous security measures to prevent cyber-attacks of various kinds as well as fraudulent and inadvertent activity by persons who have been granted access to such confidential information. Nevertheless, our systems, like all technology systems, remain vulnerable to unauthorized access, which can result in theft or corruption of information. In addition, we share information with third parties upon whom we rely for various functions. The systems of such third parties also are vulnerable to cyber threats. Attacks can come from unrelated third parties through the internet, from access to hardware removed from our premises or those of third parties or from employees acting intentionally or inadvertently.
Cyber incidents can involve deliberate attacks designed to corrupt our information systems and make them unusable by us to operate our business; thefts of information used by the perpetrators for gain in numerous ways; or inadvertent releases of information by employees or third parties with whom we do business.
Cyber-attacks that corrupt our information systems and make them unusable by us could impair our ability to trade securities in our clients’ accounts. Corruption of the systems of our third-party vendors could impact the Company to the same extent as corruption of our own systems. If information about our employees is intentionally stolen or inadvertently made public, that information could be used to commit identity theft, obtain credit in an employee’s name or steal from an employee. If information about our business is obtained by unauthorized persons, whether through intentional attacks or inadvertent releases of information, it could be used to harm our competitive position.
Whether information is corrupted, stolen or inadvertently disclosed, and regardless of the nature of the information, whether it be proprietary information or personal information about clients or employees, the results could be multiple and materially harmful to us.
Our reputation could be harmed, resulting in the loss of clients, vendors and employees or making payments or concessions to such persons to maintain our relationships with them.
Our inability to operate our business fully, even if temporarily, and thus fulfill contracts with clients or vendors could result in terminations of contracts and loss of revenue.
Harm suffered by clients or vendors whose contracts we have breached, or by clients, vendors or employees whose information is compromised, could result in costly litigation against us.
Our need to focus attention on remediation of a cyber problem could take our attention away from the operation of our business, resulting in lost revenue.

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We could incur costs to repair systems made inoperable by a cyber-attack and to make changes to our systems to reduce future cyber threats. Those changes could include obtaining additional technologies as well as employing additional personnel and training employees.
The interruption of our business or theft of proprietary information could harm our ability to compete.
All of the above potential results of a cyber incident could have a material adverse effect on the Company’s business, financial condition and results of operations.
We 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 customers while reducing costs. Our future success depends, in part, upon our ability to address customer needs by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological changes affecting the financial services industry could negatively affect our growth, revenue and profit.
Operational risks may disrupt our business, result in losses or limit our growth.
We are dependent on the capacity and reliability of the communications, information and technology systems supporting our operations, whether developed, owned and operated by the Company or by third parties. Operational risks such as trading or operational errors, interruption of our financial, accounting, trading, compliance and other data processing systems, the loss of data contained in the systems, or compromised systems due to cyber-attack, could result in a disruption of our business, liability to clients, regulatory intervention or reputational damage, and thus adversely affect our business.
Our business is subject to substantial governmental regulation, which can change frequently and may increase costs of compliance; reduce revenue; result in fines, penalties and lawsuits for noncompliance; and adversely affect our results of operations and financial condition.
Our business is subject to a variety of federal securities laws, including the Investment Advisers Act of 1940, the Investment Company Act of 1940, the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002, the U.S. PATRIOT Act of 2001 and the Dodd-Frank Wall Street Reform and Consumer Protection Act. In addition, we are subject to significant regulation and oversight by the SEC. Changes in legal, regulatory, accounting, tax and compliance requirements could have a significant effect on our operations and results, including but not limited to increased expenses and reduced investor interest in certain funds and other investment products we offer. We continually monitor legislative, tax, regulatory, accounting, and compliance developments that could impact our business. We and our 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 harm could negatively affect our financial condition and results of operations, as well as divert management’s attention from operations.
We continue to seek to understand, evaluate and, when possible, manage and control these and other business risks.
Trading in our common shares is limited, which may adversely affect the time and the price at which you can sell your shares of the Company.
Although our common shares are listed on the NASDAQ Global Select Market, the shares are held by 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 may not be able to sell your 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 directors and officers of the Company, 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 our shares.
Our insurance policies may not cover all losses and costs to which we may be exposed.
We carry insurance in amounts and under terms that we believe are appropriate. Our insurance may not cover all liabilities and losses to which we may be exposed. Certain insurance coverage may not be available or may be prohibitively expensive in future periods. As our insurance policies come up for renewal, we may need to assume higher deductibles or pay higher premiums, which could have an adverse impact on our results of operations and financial condition.
ITEM 1B.
Unresolved Staff Comments

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None.
ITEM 2.
Properties
The Company leases office space at one location in Columbus, Ohio.
The Company does not own any real estate or interests in real estate.
ITEM 3.
Legal Proceedings
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 that the Company believes could have a material adverse effect on its consolidated financial statements.
ITEM 4.
Mine Safety Disclosures
Not applicable.

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PART II
ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The following performance graph compares the total shareholder return of an investment in our common shares to that of the Russell Microcap® Index, and to a peer group index of publicly traded asset management firms for the five-year period ended on December 31, 2019. The graph assumes that the value of the investment in our common shares and each index was $100 on December 31, 2014. Total return includes reinvestment of all dividends. The Russell Microcap® Index makes up less than 3% of the U.S. equity market and is a market-value-weighted index of the smallest 1,000 securities in the small-cap Russell 2000® Index plus 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. The historical information set forth below is not necessarily indicative of future performance. We do not make or endorse any predictions as to future stock performance.
chart-86cec81a953553c8812.jpg
 
12/31/2014
 
12/31/2015
 
12/31/2016
 
12/31/2017
 
12/31/2018
 
12/31/2019
Cumulative 5 Year Total Return
Diamond Hill Investment Group, Inc.
$100
 
$141
 
$161
 
$163
 
$124
 
$125
25
%
Russell Microcap® Index
$100
 
$95
 
$114
 
$129
 
$112
 
$137
37
%
Peer Group*
$100
 
$96
 
$116
 
$133
 
$118
 
$148
48
%

* The Peer Group is based upon all publicly traded 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.; Affiliated Managers Group, Inc.; Artisan Partners Asset Management Inc.; Cohen & Steers, Inc.; Federated Investors, Inc.; GAMCO Investors, Inc.; Hennessy Advisors, Inc.; Legg Mason, Inc.; Manning & Napier, Inc.; Pzena Investment 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.

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The Company’s common shares trade on the NASDAQ Global Select Market under the symbol DHIL. The following table sets forth the high and low daily close prices during each quarter of 2019 and 2018:
 
2019
 
2018
 
High
Price
 
Low
Price
 
Dividend
Per Share
 
High
Price
 
Low
Price
 
Dividend
Per Share
Quarter ended:
 
 
 
 
 
 
 
 
 
 
 
March 31
$
158.74

 
$
133.52

 
$

 
$
215.48

 
$
198.91

 
$

June 30
$
148.30

 
$
137.73

 
$

 
$
203.54

 
$
189.30

 
$

September 30
$
142.80

 
$
127.18

 
$

 
$
197.40

 
$
162.70

 
$

December 31
$
149.60

 
$
132.70

 
$
9.00

 
$
177.08

 
$
141.10

 
$
8.00

Due to the relatively low trading volume of our 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, 2019 and 2018, approximately 4,384,590 and 2,472,251, respectively, of our common shares were traded. The dividends indicated above were special dividends. We have not paid regular quarterly dividends in the past, and have no present intention of paying regular quarterly dividends in the future. The approximate number of record holders of our common shares at December 31, 2019 was 236, although we believe that the number of beneficial owners of our common shares is substantially greater.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table sets forth information regarding our current common share repurchase program (the “Repurchase Program”) and shares withheld for tax payments due upon vesting of employee restricted stock units and restricted stock awards which vested during the fourth quarter of fiscal year 2019: 
Period
Total Number of Shares Purchased for Employee Tax Withholdings(a)
 
Total Number
of Shares 
Purchased
as part of Publicly
Announced Program(b)
 
Average Price
Paid Per Share Purchased Under the Program
 
Purchase Price of Shares
 Purchased
Under the Program
 
Aggregate Purchase Price Yet To Be Purchased Under the Program
October 1, 2019 through
October 31, 2019
2,540

 
18,636

 
$
134.17

 
$
2,500,452

 
$
17,031,238

November 1, 2019 through
November 30, 2019

 
21,172

 
$
145.46

 
$
3,079,711

 
$
13,951,527

December 1, 2019 through
December 31, 2019

 
70,543

 
$
140.77

 
$
9,930,429

 
$
4,021,098

Total
2,540

 
110,351

 
$
140.56

 
$
15,510,592

 
$
4,021,098

(a)
The Company regularly withholds shares for tax payments due upon employee Restricted Stock vestings. During the quarter ended December 31, 2019, the Company purchased 2,540 shares for employee tax withholdings at an average price paid per share of $138.13.
(b)
The Company’s current share Repurchase Program was announced on September 25, 2018. Our board of directors authorized management to repurchase up to $50,000,000 of the Company’s common shares in the open market and in private transactions in accordance with applicable securities laws. The Company’s share Repurchase Program will expire in September 2020, or will end earlier upon the repurchase of all shares authorized under the program.
The Company has entered into a Rule 10b5-1 repurchase plan in connection with its Repurchase Program.  This plan is intended to qualify for the safe harbor under Rule 10b5-1 of the Exchange Act.  A Rule 10b5-1 plan allows a company to purchase its shares at times when it would not ordinarily be in the market due to its trading policies or the possession of material nonpublic information. Purchases may be made in the open market or through privately negotiated transactions.  Purchases in the open market will be made in compliance with Rule 10b-18 under the Exchange Act. Because the repurchases under the 10b5-1 plan are subject to specified parameters and certain price, timing and volume restraints specified in the plan, there is no guarantee as to the exact number of shares that will be repurchased, or that there will be any repurchases at all pursuant to the Repurchase Program.
As of February 2020, the Company had repurchased all of the $50 million authorized under the Repurchase Program.

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ITEM 6.
Selected Financial Data
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)
2019
 
2018
 
2017
 
2016
 
2015
Income Statement Data:
 
 
 
 
 
 
 
 
 
Total revenue
$
136,624

 
$
145,628

 
$
145,202

 
$
136,103

 
$
124,426

Compensation and related costs, excluding deferred compensation expense
60,264

 
55,975

 
52,474

 
50,428

 
48,185

Deferred compensation expense (benefit)
5,977

 
(2,121
)
 
2,382

 
1,837

 
(234
)
Other expenses
22,448

 
20,518

 
23,345

 
20,769

 
17,755

Total operating expenses
88,689

 
74,372

 
78,201

 
73,034

 
65,706

Net operating income
47,935

 
71,256

 
67,001

 
63,069

 
58,720

Operating profit margin
35
%
 
49
%
 
46
%
 
46
%
 
47
%
Investment income (loss), net
30,507

 
(6,273
)
 
14,018

 
7,517

 
(737
)
Income tax expense
(18,688
)
 
(18,669
)
 
(29,417
)
 
(26,668
)
 
(20,909
)
Net income
59,754

 
46,314

 
51,602

 
46,594

 
37,074

Net income attributable to common shareholders
54,959

 
47,376

 
49,989

 
46,052

 
37,074

Per Share Information:
 
 
 
 
 
 
 
 
 
Basic earnings
$
15.99

 
$
13.49

 
$
14.49

 
$
13.52

 
$
11.31

Diluted earnings
15.99

 
13.48

 
14.48

 
13.49

 
11.03

Cash dividend declared
9.00

 
8.00

 
7.00

 
6.00

 
5.00

Weighted Average Shares Outstanding
 
 
 
 
 
 
 
 
 
Basic
3,437

 
3,512

 
3,449

 
3,407

 
3,278

Diluted
3,437

 
3,515

 
3,452

 
3,413

 
3,360

Ending shares outstanding
3,295

 
3,499

 
3,470

 
3,412

 
3,414

 
At December 31,
 
2019
 
2018
 
2017
 
2016
 
2015
Balance Sheet Data (in thousands):
 
 
 
 
 
 
 
 
 
Total cash and corporate investments held directly by DHCM
$
187,189

 
$
196,545

 
$
171,339

 
$
136,290

 
$
109,966

Total assets
272,664

 
325,728

 
250,388

 
199,718

 
145,187

Total liabilities
65,629

 
67,472

 
57,868

 
46,653

 
39,873

Redeemable noncontrolling interest
14,179

 
62,680

 
20,076

 
13,841

 

Shareholders’ equity
192,856

 
195,576

 
172,444

 
139,224

 
105,314

Book value per share
$
58.54

 
$
55.89

 
$
49.69

 
$
40.81

 
$
30.84

Assets Under Management (in millions)
23,399

 
19,108

 
22,317

 
19,381

 
16,841

Average Assets Under Management (in millions)
21,653

 
21,950

 
20,876

 
17,851

 
16,415

Net Client Inflows (Outflows) (in millions)
(677
)
 
(1,102
)
 
425

 
164

 
1,467

ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
In this Item 7, we discuss and analyze the Company’s consolidated results of operations for the past three fiscal years and other factors that may affect future financial performance. This discussion should be read in conjunction with our Consolidated Financial Statements, Notes to Consolidated Financial Statements, and Selected Financial Data contained in this Annual Report on Form 10-K.

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Table of Contents

Business Environment
The performance of the U.S. and international equity markets, as well as the U.S. fixed income market, may have a meaningful impact on our operations and financial position.
Equity Markets
Trade tensions between the U.S. and China dominated headlines throughout the year amid concerns about tariffs and a potential slowdown in global economic growth. Monetary policy also continued to be a major theme, with the Federal Reserve reversing three of the four 2018 rate hikes and resuming balance sheet expansion to placate concerns over money market volatility. The European Central Bank lowered rates and restarted a quantitative easing program in the second half of 2019. Equity markets finished the year strong, with the Russell 1000 Index returning 31.43% for the year, the strongest annual return for the Index since 2013 and the second-best return since 1997.
Fixed Income Markets
The Federal Reserve reversed three of the four 2018 rate hikes and resumed balance sheet expansion in the fourth quarter.  The most meaningful bout of volatility was triggered by the trade war and related fears of slowing global growth. Fixed income markets generated some of their best performance in the past decade driven by declining real yields and risk premia and stable inflation expectations. The Bloomberg Barclays U.S. Aggregate Bond Index returned 8.72%, its best since 2002, while the Bloomberg Barclays Investment Grade Corporate Index returned 14.54%, its best year since 2009. The ICE BofA U.S. High Yield Index returned 14.41% making 2019 a rare year in which both Treasuries and high yield bonds generated strong returns.
Industry Update
The asset management industry faces several challenging headwinds, including investor demand for passive investments and continued downward fee pressure.  Investors’ preference for lower cost passive investment strategies has reduced investment in both active investment strategies as well as all other strategies which are not in the lowest-cost quintile of peers. In 2019, passively managed US Equity Assets exceeded actively managed US Equity Assets for the first time. These trends have contributed toward increased concentration of total industry assets and continued net outflows from active investment strategies. The share of mutual fund and exchange traded fund assets at the five largest fund complexes is now over 50%. As firms seek to combat these trends, they are making increasing investments into technology, data, and analytics capabilities to seek efficiency across their businesses. Combined, these evolving product and demand trends contribute to the broad margin pressure across our industry.
While some of these dynamics make it difficult for firms to succeed, we believe we are well-positioned to navigate these headwinds and adapt to the changing industry landscape. Our commitment to managing our portfolios with a strict capacity discipline protects our ability to deliver excellent investment outcomes to clients. We continue to believe we can deliver market-beating returns over five-year periods and longer through active portfolio management, our long-term focus, and shared investment philosophy. We’re confident the combination of capacity discipline, alignment with our clients, and strong investment results will ensure our strategies are attractive options to help investors achieve their investment outcomes.

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Table of Contents

Key Financial Performance Indicators
There are a variety of key performance indicators the Company monitors in order to evaluate our 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,
 
2019
 
2018
 
2017
Ending AUM (in millions)
$
23,399

 
$
19,108

 
$
22,317

Average AUM (in millions)
21,653

 
21,950

 
20,876

Net cash inflows (outflows) (in millions)
(677
)
 
(1,102
)
 
425

 
 
 
 
 
 
Total revenue (in thousands)
136,624

 
145,628

 
145,202

Net operating income
47,935

 
71,256

 
67,001

Net operating income, as adjusted(a)
53,912

 
69,134

 
69,383

Average advisory fee rate
0.59
%
 
0.62
%
 
0.64
%
Operating profit margin
35
%
 
49
%
 
46
%
Operating profit margin, as adjusted(a)
39
%
 
47
%
 
48
%
(a) Net operating income, as adjusted, and Operating profit margin, as adjusted, are non-GAAP (as defined below) performance measures. See Use of Supplemental Data as Non-GAAP Performance Measure section within this Annual Report on Form 10-K.
Assets Under Management
Our revenue is derived primarily from investment advisory and administration fees. Investment advisory and administration fees paid to the Company are generally based on the value of the investment portfolios we manage and fluctuate with changes in the total value of our AUM. Fees are recognized in the period that the Company manages these assets.
Our revenues are highly dependent on both the value and composition of AUM. The following is a summary of our AUM by product and investment objective, and a roll-forward of the change in AUM, for the years ended December 31, 2019, 2018, and 2017:
 
Assets Under Management
As of December 31,
(in millions)
2019
 
2018
 
2017
Proprietary funds
$
16,148


$
13,440


$
15,974

Sub-advised funds
2,029


1,358


1,518

Separately managed accounts
5,222


4,310


4,825

Total AUM
$
23,399

 
$
19,108

 
$
22,317

 

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Table of Contents

 
Assets Under Management
by Investment Strategy
As of December 31,
(in millions)
2019
 
2018
 
2017
Small Cap
$
795

 
$
1,048

 
$
1,525

Small-Mid Cap
3,243

 
2,770

 
3,528

Mid Cap
569

 
143

 
130

Large Cap
12,344

 
9,637

 
10,867

All Cap Select
528

 
432

 
444

Long-Short
3,605

 
3,767

 
4,980

Global/International
35

 
18

 
6

Total Equity
21,119

 
17,815

 
21,480

Short Duration Fixed Income
809

 
579

 
313

Core Fixed Income
300

 
55

 
44

Long Duration Fixed Income
52

 
52

 

Corporate Credit
1,147

 
757

 
668

High Yield
135

 
54

 
31

Total Fixed Income
2,443

 
1,497

 
1,056

Total Equity and Fixed Income
23,562

 
19,312

 
22,536

  (Less: Investments in affiliated funds) (a)
(163
)
 
(204
)
 
(219
)
Total AUM
$
23,399


$
19,108

 
$
22,317

(a) Certain of the Funds own shares of the Diamond Hill Short Duration Total Return Fund. The Company reduces its total AUM by these investments held in this affiliated fund.

 
Change in Assets Under Management
For the Year Ended December 31,
(in millions)
2019
 
2018
 
2017
AUM at beginning of the year
$
19,108

 
$
22,317

 
$
19,381

Net cash inflows (outflows)
 
 
 
 
 
proprietary funds
(499
)
 
(978
)
 
843

sub-advised funds
216

 
(25
)
 
(164
)
separately managed accounts
(394
)
 
(99
)
 
(254
)
 
(677
)
 
(1,102
)
 
425

Net market appreciation (depreciation) and income
4,968

 
(2,107
)
 
2,511

Increase (decrease) during the year
4,291

 
(3,209
)
 
2,936

AUM at end of the year
$
23,399

 
$
19,108

 
$
22,317

 
Net Cash Inflows (Outflows) Further Breakdown
For the Year Ended December 31,
(in millions)
2019
 
2018
 
2017
Net cash inflows (outflows)
 
 
 
 
 
Equity
$
(1,515
)
 
$
(1,554
)
 
$
272

Fixed Income
838

 
452

 
153

 
$
(677
)
 
$
(1,102
)
 
$
425

Our fixed income strategies continued to see strong growth in 2019 with High Yield reaching its five-year anniversary and Core Bond and Short-Duration reaching three years. Each of our fixed income strategies have met long-term performance objectives compared to peers and benchmarks. Additionally, we supplemented our distribution efforts with dedicated resources in marketing and branding specifically for our fixed income strategies. We believe these investments will continue to benefit the broader organization as we expand our efforts in the future.

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Table of Contents

Equity flows experienced a challenging 2019 following a difficult 2018 period. The net equity outflows can primarily be attributed to underperformance in our closed strategies, as $1.4 billion of the net outflows in 2019 and 2018 were from our Small Cap, Small-Mid Cap and Long-Short strategies. As a result we reopened the Small Cap and Long-Short strategies during 2019. Additionally, we had net outflows of $0.2 billion in our Large Cap and All-Cap Select strategies in the fourth quarter due to a large client transitioning their account to a Unified Managed Account (“UMA”), which is further discussed below. Though the $0.2 billion is no longer included in AUM, as these assets are not under our discretion, we continue to receive investment advisory fees on the UMA accounts for our advisory services.
UMA Programs
The Company provides strategy model portfolio to sponsors of UMA programs. We do not have discretionary investment authority over individual client accounts in UMA programs and therefore these assets are not included in our AUM. The Company provides an updated strategy model portfolio to the sponsors on a periodic basis. The Company is paid for its services by the program sponsor at a pre-determined rate based on assets in the program. UMA program assets were $0.9 billion, $0.5 billion and $0.4 billion as of December 31, 2019, 2018 and 2017, respectively.
Consolidated Results of Operations
The following is a discussion of our consolidated results of operations.
(in thousands, except per share amounts and percentages)
2019
 
2018
 
% Change
 
2018
 
2017
 
% Change
Total revenue
$
136,624

 
$
145,628

 
(6)%
 
$
145,628

 
$
145,202

 
NM
Net operating income
47,935

 
71,256

 
(33)%
 
71,256

 
67,001

 
6%
Net operating income, as adjusted (a)
53,912

 
69,134

 
(22)%
 
69,134

 
69,383

 
NM
Net income attributable to common shareholders
54,959

 
47,376

 
16%
 
47,376

 
49,989

 
(5)%
Earnings per share attributable to common shareholders (diluted)
$
15.99

 
$
13.48

 
19%
 
$
13.48

 
$
14.48

 
(7)%
Operating profit margin
35
%
 
49
%
 
NM
 
49
%
 
46
%
 
NM
Operating profit margin, as adjusted
39
%
 
47
%
 
NM
 
47
%
 
48
%
 
NM
(a) Net operating income, as adjusted, and operating profit margin, as adjusted, are non-GAAP (as defined below) performance measures. See Use of Supplemental Data as Non-GAAP Performance Measure section within this Annual Report on Form 10-K.

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Table of Contents

Year Ended December 31, 2019 compared with Year Ended December 31, 2018
The Company generated net income attributable to common shareholders of $55.0 million ($15.99 per diluted share) for the year ended December 31, 2019, compared with net income attributable to common shareholders of $47.4 million ($13.48 per diluted share) for the year ended December 31, 2018. Revenue decreased $9.0 million period over period primarily due to a decrease in the average advisory fee rate and a decrease in average AUM. Operating expenses increased by $14.3 million primarily related to a $8.1 million change in deferred compensation expense (benefit) and a $4.3 million increase in compensation and related costs, excluding deferred compensation expense. The gain (loss) on deferred compensation plan 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 statement, and thus has no impact on net income attributable to the Company.
The Company recorded non-operating income of $30.5 million in 2019 due to market appreciation from our investments compared to a non-operating loss of $6.3 million in 2018 due to market depreciation from our investments.
Income tax expense was consistent from 2018 to 2019 due primarily to an increase of pretax income which was offset by the reduction in the effective rate from 28.7% to 23.8%. The decrease in the effective tax rate was primarily due to uncertain state tax positions of approximately $3.0 million recorded in 2018. The effective tax rate of 23.8% differed from the federal statutory tax rate of 21% due primarily to additional income tax expense recorded for the state and local jurisdictions in which we do business. This is partially offset by the benefit attributable to redeemable noncontrolling interests. The provision for income taxes includes a benefit attributable to the fact that the Company's operations include the Consolidated Funds which are not subject to federal income taxes. Accordingly, a portion of the Company's earnings are not subject to corporate tax levels. Absent the benefit attributable to redeemable noncontrolling interests, the effective tax rate ("unconsolidated effective tax rate") would have been 25.4%.
Operating profit margin was 35% for 2019 and 49% for 2018. Operating profit margin, as adjusted, was 39% for 2019 and 47% for 2018. Operating profit margin, as adjusted, is a non-GAAP performance measure. 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. Our portfolio managers are compensated based on long-term performance, so when revenues and long-term performance are misaligned, our operating margins can fluctuate materially.
See Use of Supplemental Data as Non-GAAP Performance Measure section within this Annual Report on Form 10-K.
Year Ended December 31, 2018 compared with Year Ended December 31, 2017
The Company generated net income attributable to common shareholders of $47.4 million ($13.48 per diluted share) for the year ended December 31, 2018, compared with net income attributable to common shareholders of $50.0 million ($14.48 per diluted share) for the year ended December 31, 2017. Revenue increased $0.4 million period over period primarily due to an increase in average AUM partially offset by a reduction in the administration fee rates paid by the Funds. Operating expenses decreased by $3.8 million primarily related to a decrease in compensation and related costs and general and administrative expenses. Deferred compensation expense (benefit) is offset by an equal amount in investment income (loss) below net operating income on the consolidated statements of income statement, and thus has no impact on net income attributable to the Company.
The Company recorded a non-operating loss of $6.3 million in 2018 due to market depreciation from our investments compared to non-operating income of $14.0 million in 2017 due to market appreciation and dividend income from our investments.
Income tax expense decreased $10.7 million from 2017 to 2018 due to the reduction of the effective tax rate from 36.3% to 28.7%. The reduction was primarily due to the impact of the Tax Cut and Jobs Act of 2017, which reduced our corporate income tax rate from 35% to 21% year over year. The effective tax rate of 28.7% differed from the federal statutory tax rate of 21% due primarily to additional income tax expense recorded for the state and local jurisdictions in which we do business.
Operating profit margin was 49% for 2018 and 46% for 2017. Operating profit margin, as adjusted, was 47% for 2018 and 48% for 2017.
See Use of Supplemental Data as Non-GAAP Performance Measure section within this Annual Report on Form 10-K.

22

Table of Contents

Revenue 
(in thousands, except percentages)
2019
 
2018
 
% Change
 
2018
 
2017
 
% Change
Investment advisory
$
128,009

 
$
135,318

 
(5)%
 
$
135,318

 
$
132,688

 
2%
Mutual fund administration, net
8,615

 
10,310

 
(16)%
 
10,310

 
12,514

 
(18)%
Total
136,624

 
145,628

 
(6)%
 
145,628

 
145,202

 
—%
Revenue for the Year Ended December 31, 2019 compared with Year Ended December 31, 2018
Investment Advisory Fees. Investment advisory fees decreased by $7.3 million, or 5%, from the year ended December 31, 2018 to the year ended December 31, 2019. 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 decrease in investment advisory fees was driven by a reduction in the average advisory fee rate from 0.62% in 2018 to 0.59% in 2019 and a decrease of 1% in average AUM year-over-year. The decrease in average advisory fee rate was driven by an increase in the mix of assets held in lower fee rate strategies during the year ended December 31, 2019, compared to the year ended December 31, 2018. For the year ended December 31, 2019, the average advisory fee rates for equity and fixed income strategies were 0.61% and 0.41%, respectively. For the year ended December 31, 2018 the average advisory fee rates for equity and fixed income strategies were 0.63% and 0.48%, respectively.
Mutual Fund Administration Fees. Mutual fund administration fees decreased $1.7 million, or 16%, from the year ended December 31, 2018 to the year ended December 31, 2019. Mutual fund administration fees are calculated as a percentage of average Funds’ AUM. The decrease was due to reductions in the administration fee rates received from the Funds, a 4% decrease in average Funds’ AUM in 2019 and an increase in administrative expenses paid on behalf of the funds.
The table below summarizes the decreases in the administration fee rates during the periods indicated:
 
Class A & C
 
Class I
 
Class Y
1/1/2018 - 2/27/2018
0.23%
 
0.18%
 
0.08%
2/28/2018 - 12/31/2019
0.21%
 
0.17%
 
0.05%
Revenue for the Year Ended December 31, 2018 compared with Year Ended December 31, 2017
Investment Advisory Fees. Investment advisory fees increased by $2.6 million, or 2%, from the year ended December 31, 2017 to the year ended December 31, 2018. 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 increase in investment advisory fees was driven by an increase of 5% in average AUM year-over-year and was partially offset by a reduction in the average advisory fee rate from 0.64% in 2017 to 0.62% in 2018. The decrease in average advisory fee rate was driven by an increase in the mix of assets held in lower fee rate strategies during the year ended December 31, 2018, compared to the year ended December 31, 2017. For the year ended December 31, 2018, the average advisory fee rates for equity and fixed income strategies were 0.63% and 0.48%, respectively. For the year ended December 31, 2017 the average advisory fee rates for equity and fixed income strategies were 0.64% and 0.52%, respectively,
Mutual Fund Administration Fees. Mutual fund administration fees decreased $2.2 million, or 18%, from the year ended December 31, 2017 to the year ended December 31, 2018. Mutual fund administration fees are calculated as a percentage of average Funds’ AUM. The decrease was due to reductions in the administration fee rates received from the Funds and an increase in shareholder servicing expenses and required shareholder mailings that DHCM pays on behalf of the Funds. This was partially offset by the 5% increase in average Funds’ AUM from 2018 to 2017. The table below summarizes the decreases in the administration fee rates during the periods indicated:
 
Class A & C
 
Class I
 
Class Y
1/1/2017 - 5/31/2017
0.24%
 
0.19%
 
0.09%
6/1/2017 - 2/27/2018
0.23%
 
0.18%
 
0.08%
2/28/2018 - 12/31/2018
0.21%
 
0.17%
 
0.05%

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Table of Contents

Expenses
(in thousands, except percentages)
2019
 
2018
 
% Change
 
2018
 
2017
 
% Change
Compensation and related costs, excluding deferred compensation expense
$
60,264

 
$
55,975

 
8%
 
$
55,975

 
$
52,474

 
7%
Deferred compensation expense (benefit)
5,977

 
(2,121
)
 
NM
 
(2,121
)
 
2,382

 
NM
General and administrative
13,278

 
11,649

 
14%
 
11,649

 
14,037

 
(17)%
Sales and marketing
5,867

 
5,243

 
12%
 
5,243

 
4,994

 
5%
Mutual fund administration
3,303

 
3,626

 
(9)%
 
3,626

 
4,313

 
(16)%
Total
88,689

 
74,372

 
19%
 
74,372

 
78,200

 
(5)%
Expenses for the Year Ended December 31, 2019 compared with Year Ended December 31, 2018
Compensation and Related Costs, Excluding Deferred Compensation Expense. Employee compensation and benefits increased by $4.3 million from the year ended December 31, 2018 to the year ended December 31, 2019. This increase is due to an increase in salary and related benefits of $3.0 million and an increase in incentive compensation of $1.3 million. We had 128 average full-time equivalent employees for 2019, compared to 120 for 2018. Incentive compensation expense can fluctuate significantly period over period as we evaluate investment performance, individual performance, Company performance and other factors.
Deferred Compensation Expense (Benefit). Deferred compensation expense was $6.0 million for the year ended December 31, 2019 due to market appreciation on our deferred compensation investments compared to deferred compensation (benefit) of $(2.1) million for the year ended December 31, 2018 due to market depreciation on our deferred compensation investments. The gain (loss) on deferred compensation plan investments increases (decreases) deferred compensation expense (benefit) and is included in operating income. Deferred compensation expense is offset by an equal amount in investment income below net operating income on the consolidated statements of income statement, and thus has no impact on net income attributable to the Company.
General and Administrative. General and administrative expenses increased by $1.6 million, or 14%, from the year ended December 31, 2018 to the year ended December 31, 2019. This increase is primarily due to increased corporate recruiting fees of $1.0 million, an increase in market research and data expense of $0.3 million, and an increase in software expense of $0.3 million.
Sales and Marketing. Sales and marketing expenses increased by $0.6 million, or 12%, from the year ended December 31, 2018 to the year ended December 31, 2019. The increase was due to our branding and public relations initiatives and additional sales data costs. For each of the years ended December 31, 2019 and 2018, approximately 56% and 65%, respectively, of sales and marketing expense is related to revenue sharing payments made to third party financial intermediaries.
Mutual Fund Administration. Mutual fund administration expenses decreased by $0.3 million, or 9%, from the year ended December 31, 2018 to the year ended December 31, 2019. Mutual fund administration expenses consist of both variable and fixed expenses. The variable expenses are based on Fund AUM and the number of shareholder accounts. The decrease was primarily due to a reduction in outsourced administrative services for the Funds which was brought in-house during 2018 and a 4% decrease in average Funds’ AUM from the year ended December 31, 2018 to the year ended December 31, 2019.
Expenses for the Year Ended December 31, 2018 compared with Year Ended December 31, 2017
Compensation and Related Costs, Excluding Deferred Compensation Expense. Employee compensation and benefits increased by $3.5 million from the year ended December 31, 2017 to the year ended December 31, 2018. This increase is due to an increase in salary and related benefits of $2.8 million and an increase in incentive compensation of $1.2 million, partially offset by a decrease in restricted stock expense of $0.4 million. We had 120 average full-time equivalent employees for 2018, compared to 114 for 2017. Incentive compensation expense can fluctuate significantly period over period as we evaluate investment performance, individual performance, Company performance and other factors.
Deferred Compensation Expense (Benefit). Deferred compensation (benefit) was $(2.1) million for the year ended December 31, 2018 due to market depreciation on our deferred compensation investments compared to deferred compensation expense of $2.4 million for the year ended December 31, 2017 due to market appreciation on our deferred compensation investments. The gain (loss) on deferred compensation plan investments increases (decreases) deferred compensation expense

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(benefit) and is included in operating income. Deferred compensation expense is offset by an equal amount in investment income below net operating income on the consolidated statements of income statement, and thus has no impact on net income attributable to the Company.
General and Administrative. General and administrative expenses decreased by $2.4 million, or 17%, from the year ended December 31, 2017 to the year ended December 31, 2018. This decrease is primarily due to a decrease in charitable donations of $2.7 million and a decrease of $0.7 million of consulting expense due to bringing more business functions in-house. The decrease was partially offset by increases in investment research expenses of $0.5 million, depreciation expense of $0.3 million and information technology expense of $0.2 million.
Sales and Marketing. Sales and marketing expenses increased by $0.2 million, or 5%, from the year ended December 31, 2017 to the year ended December 31, 2018. This increase was primarily due to additional payments made to third party financial intermediaries related to the sale of our proprietary funds. For each of the years ended December 31, 2018 and 2017, approximately 65% of sales and marketing expense is related to revenue sharing payments made to third party financial intermediaries.
Mutual Fund Administration. Mutual fund administration expenses decreased by $0.7 million, or 16%, from the year ended December 31, 2017 to the year ended December 31, 2018. Mutual fund administration expenses consist of both variable and fixed expenses. The variable expenses are based on Fund AUM and the number of shareholder accounts. The decrease was primarily due to a reduction in outsourced administrative services for the Funds which was brought in-house during 2018.
Liquidity and Capital Resources
Sources of Liquidity
Our current financial condition is highly liquid, with a significant amount of our assets comprised of cash and cash equivalents, investments, accounts receivable, and other current assets. Our main source of liquidity is cash flows from operating activities, which are generated from investment advisory and mutual fund administration fees. Cash and cash equivalents, investments held directly by DHCM, accounts receivable, and other current assets represented $211 million and $216 million of total assets as of December 31, 2019 and 2018, respectively. We believe these sources of liquidity, as well as our continuing cash flows from operating activities, will be sufficient to meet our current and future operating needs for 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 our main uses of cash will be for operating expenses and seed capital to fund new and existing investment strategies.
Our Board of Directors and management regularly review various factors to determine whether we have capital in excess of that required for the business and the appropriate use of any excess capital. The factors considered include our investment opportunities, capital needed for investment strategies, risks, and future dividend and capital gain tax rates. On September 25, 2018, we announced that our Board of Directors had authorized the Repurchase Program.
The authority to repurchase shares may be exercised from time to time as market conditions warrant and is subject to regulatory considerations. Evaluating management’s stewardship of capital for shareholders is a central part of our investment discipline that we practice for our clients. We hold ourselves to the same standard.
The following table summarizes the quarterly repurchase transactions made under the Repurchase Program since its inception:
Period
Total Number
of Shares 
Purchased
 
Average Price
Paid Per Share Purchased
 
Purchase Price of Shares
Purchased
Quarter Ended December 31, 2018
45,470

 
$
158.99

 
$
7,229,249

Quarter Ended March 31, 2019
53,645

 
147.40

 
7,907,055

Quarter Ended June 30, 2019
54,950

 
141.08

 
7,752,572

Quarter Ended September 30, 2019
57,207

 
132.49

 
7,579,435

Quarter Ended December 31, 2019
110,351

 
140.56

 
15,510,592

Total
321,623

 
$
142.96

 
$
45,978,903


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While 2019 was the twelfth consecutive year that the Company has paid a special dividend, there can be no assurance that we will pay a dividend in the future. We have paid out special dividends totaling $24.00 per share from 2017 through 2019. The 2019, 2018, and 2017 special dividends reduced shareholders’ equity by $30.3 million, $28.1 million, and $24.3 million, respectively.
Working Capital
As of December 31, 2019, the Company had working capital of approximately $177 million, compared to $180 million at December 31, 2018. Working capital includes cash, accounts receivable, investments, direct investments in Consolidated Funds, and other current assets of DHCM, net of accounts payable and accrued expenses, accrued incentive compensation, deferred compensation and other current liabilities of DHCM.
The Company has no debt, and we believe our available working capital is sufficient to cover current expenses and presently anticipated capital expenditures.
Below is a summary of investments as of December 31, 2019 and 2018:
 
As of December 31,
 
2019
 
2018
Corporate Investments:
 
 
 
Diamond Hill Core Bond Fund
$
43,691,925

 
$
37,197,134

Diamond Hill Research Opportunities Fund
16,223,519

 
12,912,291

Diamond Hill High Yield Fund
14,984,548

 
25,931,879

Diamond Hill Global Fund
11,073,515

 
8,482,790

Diamond Hill International Fund(a)
8,039,570

 
1,057,445

Diamond Hill Mid Cap Fund

 
15,035,251

Diamond Hill Valuation-Weighted 500 ETF(b)

 
11,497,699

Total Corporate Investments
94,013,077

 
112,114,489

Deferred Compensation Plan Investments in the Funds
30,342,204

 
22,387,874

Total investments held by DHCM
124,355,281

 
134,502,363

Redeemable noncontrolling interest in Consolidated Funds(c)
15,081,897

 
68,985,854

Total investments
$
139,437,178

 
$
203,488,217

(a) As of June 28, 2019, the Company converted the Diamond Hill International Equity Fund, L.P. into the Diamond Hill International Fund.
(b) The Diamond Hill Valuation-Weighted 500 ETF that the Company previously advised (the “ETF”) closed effective April 5, 2019.
(c) The Company deconsolidated the ETF, Diamond Hill Core Bond Fund, and the Diamond Hill High Yield Fund during the year ended December 31, 2019, as the Company’s ownership in each declined to less than 50%.
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 as share-based compensation, and timing differences in the cash settlement of operating assets and liabilities. We expect that cash flows provided by operating activities will continue to serve as our primary source of working capital in the near future.
For the year ended December 31, 2019, net cash provided by operating activities totaled $57.0 million. Cash provided by operating activities was primarily driven by net income of $59.8 million, the add back of share-based compensation of $9.1 million, depreciation of $1.2 million, net redemptions of securities held in the underlying investment portfolios of the Consolidated Funds of $6.3 million, and the effect of other non-cash items and timing differences in the cash settlement of assets and liabilities of $1.7 million. These cash inflows were partially offset by net gains on investments of $21.1 million. Absent the operating cash flows of the Consolidated Funds, cash flow from operations would have been approximately $53.5 million.

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For the year ended December 31, 2018, net cash provided by operating activities totaled $28.1 million. The changes in net cash provided by operating activities were primarily driven by net income of $46.3 million, the add back of share-based compensation of $8.9 million and depreciation of $1.2 million, net losses on investments of $14.3 million, and the effect of other non-cash items and timing differences in the cash settlement of assets and liabilities of $9.6 million. These cash inflows were partially offset by the net purchases of trading securities held in the underlying investment portfolio of the Consolidated Funds of $52.2 million. Absent the operating cash flows of the Consolidated Funds, cash flow from operations would have been approximately $79.9 million.
For the year ended December 31, 2017, net cash provided by operating activities totaled $60.9 million. The changes in net cash provided by operating activities were primarily driven by net income of $51.6 million and the add back of share-based compensation of $8.6 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 $5.3 million. These cash inflows were partially offset by the net change in securities held in our Consolidated Funds underlying investment portfolios of $5.5 million. Absent the operating cash flows of the Consolidated Funds, cash flow from operations would have been approximately $64.3 million.
Cash Flows from Investing Activities
The Company’s cash flows from investing activities consist primarily of capital expenditures and purchases and redemptions in our investment portfolio.
Cash flows provided by investing activities totaled $10.9 million for the year ended December 31, 2019. The Company purchased corporate investments of $14.4 million (inclusive of $5.0 million of purchases into our deferred compensation plans) and made $0.7 million of property and equipment purchases during the period. These cash outflows were offset by redemptions of corporate investments of $48.6 million. The remaining change in reported cash flows from investing activities was attributable to $22.7 million in net cash that was removed from our balance sheet due to the deconsolidation of the ETF during the period.
Cash flows used in investing activities totaled $4.3 million for the year ended December 31, 2018. The Company purchased corporate investments of $6.3 million and made $0.8 million of property and equipment purchases during the period. These cash outflows were partially offset by redemptions of corporate investments of $2.9 million.
Cash flows used in investing activities totaled $18.6 million for the year ended December 31, 2017. The Company purchased corporate investments of $21.0 million 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 $3.6 million.
Cash Flows from Financing Activities
The Company’s cash flows from financing activities consist primarily of the payment of special dividends, the repurchase of its common shares, shares withheld related to employee tax withholding and distributions to, or contributions from, redeemable noncontrolling interest holders.
For the year ended December 31, 2019, net cash used in financing activities totaled $59.1 million, consisting of the payment of special dividends of $30.3 million, the repurchase of the Company’s common shares of $38.7 million, and the value of shares withheld related to employee tax withholding of $1.4 million. These financing outflows were partially offset by net subscriptions received from redeemable noncontrolling interest holders of $11.3 million.
For the year ended December 31, 2018, net cash used in financing activities totaled $16.0 million, consisting of the payment of special dividends of $28.1 million, the repurchase of the Company’s common shares of $7.2 million, and the value of shares withheld related to employee tax withholding of $1.9 million. These financing outflows were partially offset by net subscriptions received from redeemable noncontrolling interest holders of $21.2 million.
For the year ended December 31, 2017, net cash used in financing activities totaled $23.0 million, consisting of the payment of special dividends of $24.3 million and the value of shares withheld related to employee tax withholding of $5.0 million. These financing outflows were partially offset by net subscriptions received from redeemable noncontrolling interest holders of $6.3 million.

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Supplemental Consolidated Cash Flow Statement
The following table summarizes the condensed cash flows for the years ended December 31, 2019, 2018, and 2017 that are attributable to Diamond Hill Investment Group, Inc. and to the Consolidated Funds, and the related eliminations required in preparing the consolidated financial statements.
 
Year Ended December 31, 2019
 
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
$
54,959,024

 
$
12,108,850

 
$
(7,313,555
)
 
$
59,754,319

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 

Depreciation
1,164,207

 

 

 
1,164,207

Share-based compensation
9,081,421

 

 

 
9,081,421

Net (gains)/losses on investments
(16,263,168
)
 
(12,108,850
)
 
7,313,555

 
(21,058,463
)
Net change in securities held by Consolidated Funds

 
6,286,645

 

 
6,286,645

Other changes in assets and liabilities
4,518,254

 
(2,780,140
)
 

 
1,738,114

Net cash provided by operating activities
53,459,738

 
3,506,505

 

 
56,966,243

Net cash provided by (used in) investing activities
25,702,461

 
(22,723,853
)
 
7,876,466

 
10,855,074

Net cash provided by (used in) financing activities
(70,416,005
)
 
19,217,348

 
(7,876,466
)
 
(59,075,123
)
Net change during the period
8,746,194

 

 

 
8,746,194

Cash and cash equivalents at beginning of year
84,430,059

 

 

 
84,430,059

Cash and cash equivalents at end of year
$
93,176,253

 
$

 
$

 
$
93,176,253

 
Year Ended December 31, 2018
 
Cash flow attributable to Diamond Hill Investment Group, Inc.
 
Cash flow attributable to Consolidated Funds