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Diamond Hill Investment Group Earnings Show That Stock Pickers Aren't Dead Yet

Diamond Hill Investment Group (NASDAQ: DHIL) reported second-quarter results on July 26. Despite multiple industry trends moving against it, the active fund manager continues to attract more investor capital.

Investor assets continue to flow to Diamond Hill. Image source: Getty Images.

Diamond Hill Investment Group results: The raw numbers

Metric

Q2 2017

Q2 2016

Year-Over-Year Change

Revenue

$35.5 million

$32.7 million

9%

Net income

$12.6 million

$9.7 million

30%

Earnings per share

$3.66

$2.84

29%

Data Source: Diamond Hill Investment Group Q2 2017 earnings press release.

What happened with Diamond Hill Investment Group this quarter? 

Diamond Hill enjoyed net cash inflows of $193 million, which, together with market gains of $398 million, helped to drive the investment firm's assets under management higher to more than $20.9 billion at the end of the second quarter, up from less than $17.6 billion at the end of Q2 2016.

This increase in assets under management fueled a 14% jump in Diamond Hill's investment advisory fees to $32.6 million, despite a 1-basis-point year-over-year decrease in its average advisory fee rate to 0.64%. Mutual fund administration fees, however, fell 28% to $3 million because of Diamond Hill's sale of its Beacon Hill business in 2016, as well as a reduction in its administration fee rate to 0.08% from 0.10% in the prior-year period.

Net operating income rose 9%, to $16 million, as operating margin held steady at 45%. Investment income was $3 million, up from $0.7 million in the year-ago quarter.

Net income, which benefited from a lower effective tax rate, leapt 30% to $12.6 million. But because market fluctuations can cause investment income to vary widely from one quarter to the next, Diamond Hill's management focuses more on net operating income after tax, a non-GAAP metric that excludes the impact of investment-related activity. In this regard, adjusted net operating income after tax jumped 20%, to $11.2 million, or $3.25 per share.

Looking forward

With the investment world rapidly moving toward low-cost, passively managed index funds and ETFs, few would argue that Diamond Hill is swimming against a powerful tide. Yet despite a seemingly endless barrage of news stories about how Vanguard and other index-fund titans are swallowing up the entire fund industry, boutique investment manager Diamond Hill continues to quietly grow its assets under management.

Still, Diamond Hill is likely to remain the underdog in this story. That's not to say it can't compete for -- and win -- its fair share of assets under management. In fact, with its funds' impressive track records of market-beating performance, it's entirely possible that Diamond Hill can continue to grow its assets under management even if the overall actively managed pie shrinks in the years ahead.

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Joe Tenebruso has no position in any stocks mentioned. The Motley Fool recommends Diamond Hill Investment Group. The Motley Fool has a disclosure policy.