Diamond Hill Investment Group (NASDAQ:DHIL) reported third-quarter results  on Oct. 26. The investment manager's advisory fees are growing along with its clients' assets, allowing it to pay out a large portion of its profits to its investors.

Diamond Hill Investment Group results: The raw numbers


Q3 2017

Q3 2016

Year-Over-Year Change


$36.8 million

$32.9 million


Net income

$12.7 million

$13.4 million


Earnings per share




Data source: Diamond Hill Investment Group Q3 2017 earnings press release.

What happened with Diamond Hill Investment Group this quarter?

Diamond Hill enjoyed net cash inflows of $42 million, as $106 million of inflows to its proprietary funds were partly offset by $65 million of outflows from its sub-advised funds.

These net cash inflows, combined with market gains of $489 million, helped the investment firm's assets under management (AUM) grow to $21.5 billion at the end of the third quarter, up from $18.1 billion at the end of Q3 2016.

Diamond Hill's investment advisory fees rose along with its AUM, increasing 14% to $33.8 million, even as the firm decreased its average advisory fee rate to 0.64% from 0.65% in the year-ago quarter. Mutual fund administration fees, however, fell 13% to $3 million. 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 0.09%  -- contributed to the decline.

Net operating income jumped 12%, to $16.9 million, as operating margins held steady at 46%. Investment income, however, was $2.8 million, down from $3.6 million in the prior-year period.

All told, net income fell 5% to $12.7 million, primarily due to the lower investment income and a $2.7 million gain from the sale of Beacon Hill that positively impacted Q3 2016's results. 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 14%, to $11.6 million, or $3.35 per share.

A businessperson handing out money

Image source: Getty Images.

Capital returns

Diamond Hill's board of directors approved a $7.00-per-share special dividend. It will be paid on Dec. 11, 2017, to shareholders of record as of Dec. 1, 2017. This marks the 10th consecutive year that the company has paid a special dividend.

Diamond Hill's asset-light business model scales nicely as its AUM grows; its investment team can manage billions of dollars in additional capital without much of an increase in expenses. In turn, the company's operations produce vast amounts of free cash flow, to the tune of more than $40 million so far in 2017. And management has made a habit of passing a sizable chunk of this cash on to shareholders in the form of special dividends.

Thus, investors should expect Diamond Hill to continue to do what it does best: deliver solid returns to its investment clients and shareholders alike.

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