Overview of the Company’s Financial Performance

Diamond Hill Investment Group, Inc. (the “Company”) reported strong financial results in 2024, with total revenue increasing 11% to $151.1 million and net operating income rising 24% to $43.9 million compared to the prior year. The company’s adjusted net operating profit margin, which excludes the impact of certain non-recurring items, expanded from 30% in 2023 to 32% in 2024.

The primary driver of the company’s revenue growth was a 16% increase in total average assets under management (AUM) and assets under advisement (AUA) to $31.6 billion. However, the average advisory fee rate declined from 0.47% in 2023 to 0.45% in 2024 as the company saw faster growth in its fixed income strategies, which have lower fee rates than its equity strategies.

Net income attributable to common shareholders increased 2% to $43.2 million, or $15.66 per diluted share, in 2024 compared to $42.2 million, or $14.32 per diluted share, in 2023. The year-over-year increase was primarily driven by higher revenues, partially offset by lower investment income.

Revenue and Profit Trends

The company’s revenue is highly dependent on the value and composition of its AUM and AUA. In 2024, investment advisory fees, which make up the majority of the company’s revenue, increased 11% to $143.3 million. This was due to the 16% increase in total average AUM and AUA, partially offset by the decline in the average advisory fee rate.

Fund administration fees, which include fees received from the company’s proprietary funds, increased 3% to $7.8 million in 2024. This increase was driven by a 15% rise in the proprietary funds’ average AUM, partially offset by higher administration fees paid on behalf of the funds as a percentage of average fund AUM.

On the expense side, total operating expenses increased 6% to $107.2 million in 2024. This was primarily due to a 5% increase in compensation and related costs (excluding deferred compensation expense), as well as a 12% rise in both general and administrative expenses and sales and marketing expenses.

The company’s net operating profit margin expanded from 26% in 2023 to 29% in 2024. Adjusting for the impact of the company’s deferred compensation plan and consolidated funds, the adjusted net operating profit margin increased from 30% to 32% over the same period. This margin expansion was driven by the revenue growth outpacing the increase in operating expenses.

Strengths and Weaknesses

A key strength of the company is its diversified investment strategies and product offerings, which span U.S. equity, international equity, and fixed income asset classes. This diversification helps mitigate the impact of market rotations between different investment styles and asset types. The company’s equity-focused strategies have generally performed well compared to their Morningstar category peers, with 50-80% of funds outperforming their category averages over the 1-, 3-, 5-, and 10-year periods.

However, the company has faced challenges in keeping pace with core benchmarks, as many of its valuation-sensitive investment strategies have struggled to match the performance of growth-oriented indices. Additionally, the company’s fixed income strategies have had mixed results, with the Short Duration Securitized Bond strategy outperforming its benchmark, while the Core Bond strategy has underperformed.

Another potential weakness is the company’s reliance on a relatively small number of large clients. The top 10 clients accounted for approximately 35% of total AUM as of December 31, 2024. The loss of one or more of these large clients could have a material adverse impact on the company’s financial results.

Outlook and Future Prospects

Looking ahead, the company faces both opportunities and challenges. On the positive side, the continued growth of passively managed strategies and exchange-traded funds (ETFs) could benefit the company, as it has seen strong inflows into its own ETF offerings. The expansion of actively managed ETFs, which now represent 26% of total ETF flows, also presents a potential growth avenue for the company.

However, the company may need to navigate a shifting competitive landscape, as other asset managers continue to introduce new investment products and strategies to meet evolving client demands. Additionally, the company’s ability to attract and retain clients will be heavily dependent on its ability to generate strong long-term investment performance, particularly relative to its benchmarks.

Overall, the company’s solid financial performance in 2024, diversified product offerings, and focus on risk-adjusted returns position it well to navigate the challenges and capitalize on the opportunities in the asset management industry. Continued execution on its strategic initiatives and a steadfast commitment to delivering value for clients will be critical to the company’s long-term success.