Small-Cap Value Changes

Small-Cap Value Changes

We’ve made a change in our small-cap value stock category. We’ve replaced the Queens Road Small-Cap Value fund with Diamond Hill Small-Cap Institutional (DHSIX). This fund has been on our radar for years, but only recently were we able to purchase the institutional share class. The team at Queens Road did a fine job for us, but Diamond Hill was always our first choice so we’re very happy that it’s now available for our clients.

I met with the Diamond Hill Investments founder and CEO, Ric Dillon, back in March of this year as part of our continuing due diligence on the fund. The purpose of the meeting was to gain insight into their firm’s culture and philosophy as we considered our options in the small-cap value category.

After only a few minutes I was genuinely impressed with Ric’s approach to the discussion. He came across as very humble, and seemed more interested in learning about Financial Synergies than talking about himself. I did not feel like he was immediately trying to “sell” me. Ric founded the firm in the year 2000. Diamond Hill Investments is publicly traded on the NASDAQ exchange with $10.2 billion under management.

We’ve done extensive analysis on the fund, and there is no question that it’s been an exceptional performer since its inception. So the bulk of my conversation with Ric was focused on the more qualitative factors that make up Diamond Hill Investments, since this information is impossible to uncover by just looking at the numbers. I thought the following were particularly noteworthy:

>Since the firm’s inception they have not lost one primary fund manager or lead analyst.

>All employees must own Diamond Hill funds to represent an asset class in which Diamond Hill runs a strategy.

>Fund managers must have a “significant” stake of their own money invested in Diamond Hill funds.

>To avoid conflicts of interest, no employee may own any individual stocks.

>Fund managers are compensated on fund performance only, not growth in fund assets.

>The firm is a model of transparency – the website offers a detailed description of their straightforward investment philosophy, valuation models, and fees.

>They rarely launch new funds, preferring to stick to their areas of expertise rather than trying to capitalize on every new investment fad.

>Morningstar awarded Diamond Hill their highest honor – the Gold Star Analyst Rating (in the areas of firm culture and stewardship they are second to none).

>Lead manager on the small-cap strategy, Tom Schindler, is a young guy with a long tenure – and has had the privilege of studying under Ric Dillon for more than 13 years.

As I mentioned above we’ve run the detailed analysis on the Diamond Hill Small-Cap fund, and the numbers speak for themselves. It is a fantastic long-term risk-adjusted performer. Tom Schindler applies a classic value (Graham/Dodd) approach to investing. Simply put, he buys stocks trading below his estimates of their intrinsic value, and sells them once they reach that value.

He keeps a long-term viewpoint (5-7 years) on his stocks’ performance, so the fund boasts one of the lowest portfolio turnovers in the category. He’s not beholden to any benchmark’s sector weighting, and will pursue value where he finds it. It’s not unusual for the fund to look very different than the Russell 2000 Value Index.

Inherent in the classic value style is the downside protection gained by buying undervalued stocks, and this fund has not disappointed in that regard. Since its inception thirteen years ago the fund has handily outperformed the bulk of the category in down markets.

It goes without saying that Diamond Hill is a first-class asset management firm. Their proactive effort to put their clients’ interests ahead of their own is a rare quality in the investment world. Couple this with outstanding risk-adjusted performance and you’ve got a winning combination. Our clients will be well served with Diamond Hill.

–Mike Minter

 

Mike Minter

Mike Minter

Mike develops investment portfolio allocations, handles trading and rebalancing, and conducts research and analysis as a Portfolio Manager and Financial Advisor for the firm. As a perpetual student of investing and the markets, Mike considers himself obsessed with the subject. Mike has earned the CERTIFIED FINANCIAL PLANNER™ (CFP®) and Certified Fund Specialist® designations. He is also an active member of the Houston chapter of the Financial Planning Association (FPA).

 
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