Market-Fueled Gains Drive Diamond Hill Investment Group, Inc. Earnings Higher

Image source: Getty Images.

Diamond Hill Investment Group (DHIL 1.64%) reported third-quarter results on Oct. 26. The asset management company saw its advisory revenue bolstered by investment income, which, along with gains related to the sale of a subsidiary, led to a sharp increase in profits.

Diamond Hill Investment Group results: The raw numbers

Data source: Diamond Hill Investment Group Q3 2016 earnings press release. YOY = year over year.

What happened with Diamond Hill Investment Group this quarter?

Diamond Hill experienced net cash outflows of $528 million during the third quarter. However, in terms of assets under management, investment gains of more than $1 billion more than offset these outflows, helping its AUM grow to nearly $18.1 billion as of Sept. 30, 2016, up from $15.9 billion at the end of Q3 2015.

Its higher AUM boosted investment advisory revenue by 7% year over year to $29.5 million. Mutual fund administration revenue, however, fell 13% to $3.4 million due primarily to Diamond Hill's recent sale of its Beacon Hill Fund Services business. In all, total revenue rose 5% to $32.9 million.

Net operating income grew 7% to $15.1 million, with operating margin improving to 46% from 45% in the prior-year period.

Investment income was $3.6 million, compared to a loss of $3.5 million in the year-ago quarter. These gains and losses can change significantly from one period to another, and market fluctuations can distort the underlying operating performance of the company. As such, Diamond Hill's management focuses more on net operating income after tax, a metric that excludes the impact of investment-related activity. In this regard, third-quarter net operating income after tax rose 8% to $9.7 million and increased 7% on a per-share basis to $2.83.

Additionally, Diamond Hill announced that it will pay a $6-per-share special dividend to shareholders of record on Dec. 2, 2016, payable on Dec. 12, 2016, marking the ninth consecutive year that the company will have paid a special dividend to its investors.

Looking forward

Diamond Hill recently strengthened its fixed-income offerings with the launch of two new bond funds in September. The Diamond Hill Core Bond Fund (DHRYX) will add a diversified bond offering to the lineup. And with an average portfolio duration of less than three years, the Diamond Hill Short Duration Total Return Fund (DHEAX) is well positioned to appeal to investors searching for a fixed-income option that will be less sensitive to rising interest rates.

These new funds should help Diamond Hill better diversify its assets under management going forward. However, investors should be aware that Diamond Hill remains a primarily equity-focused investment firm, and as such, it will largely see its revenue and profits rise and fall along with the long-term performance of the stock market.