Net Inflows, Market Gains Fuel Diamond Hill Investment Group, Inc. Earnings

By Joe Tenebruso Markets Fool.com

Diamond Hill Investment Group (NASDAQ: DHIL) reported first-quarter results on April 26. The investment management company is benefiting from a seemingly relentless bull market despite shifting competitive dynamics within its industry.

Continue Reading Below

Diamond Hill Investment Group results: The raw numbers

Metric

Q1 2017

Q1 2016

Year-Over-Year Change

Revenue

$35.1 million

$30.5 million

15%

Net income

$12.8 million

$9.3 million

38%

Earnings per share

$3.71

$2.73

36%

Data source: Diamond Hill Investment Group Q1 2017 earnings press release.

What happened with Diamond Hill Investment Group this quarter?

Diamond Hill experienced net cash inflows of $167 million, which when combined with market gains of $785 million, helped the firm's assets under management grow to $20.3 billion at the end of the first quarter, up from $17.4 billion at the end of Q1 2016.

Continue Reading Below

The current bull market has been a boon for Diamond Hill. Image source: Getty Images.

In turn, Diamond Hill's investment advisory feesincreased 19% to $31.8 million, despite a 1-basis-point year-over-year decrease in its average advisory fee rate to0.64%. Mutual fund administration fees, however,fell 12% to $3.3 million due to the sale of its Beacon Hill business, as well as a decline in the net administration fee rate to0.09%from0.10% in the year ago period.

Net operating income increased 16%, to $15.8 million, as operating margins held steady at 45%. Investment income was $3.8 million, up from $0.7 million in the prior-year quarter.

Net income, which benefited from a lower effective tax rate, jumped 38% to $12.8 million. Yet because market fluctuations can cause investment income to change significantly from one period to another, Diamond Hill's management focuses more on net operating income after tax, which excludes the impact of investment-related activity. In this regard, adjusted net operating income after tax increased 23%, to $11 million, and 22% on a per-share basis to $3.20.

Looking forward

Diamond Hill continues to buck the trend toward passive investment strategies. It once again enjoyed net inflows in the first quarter, even as much of the industry is seeing capital flow to index funds and away from the type of actively managed funds that Diamond Hill operates. Yet it remains to be seen how long Diamond Hill can continue to fight -- and win -- this uphill battle.

Still, with a proven investing philosophy, a culture focused on fulfilling its fiduciary responsibility to clients, and a track record of success in both the management and marketing of its funds, Diamond Hill should be able to weather the storm better than most. In fact, it could continue to grow its assets under management by taking share from faltering competitors, even if the overall actively managed fund industry shrinks in size in the years ahead.

10 stocks we like better than Diamond Hill Investment Group
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Diamond Hill Investment Group wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of April 3, 2017

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