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Table of Contents

United States
Securities and Exchange Commission
Washington, D.C. 20549

Form 10-K

(Mark One)

☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2020
or

☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to
Commission file number 000-24498

DIAMOND HILL INVESTMENT GROUP, INC.
(Exact name of registrant as specified in its charter)

Ohio |  | 65-0190407
(State of incorporation) |  | (I.R.S. Employer Identification No.)

325 John H. McConnell Blvd, Suite 200, Columbus, Ohio 43215
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (614) 255-3333
Securities registered pursuant to Section 12(b) of the Act:

Title of each class |  | Trading Symbol |  | Name of each exchange on which registered
Common shares, no par value |  | DHIL |  | The NASDAQ Stock Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer |  | ☐ |  | Accelerated filer |  | ☒
Non-accelerated filer |  | ☐ |  | Smaller reporting company |  | ☐
|  |  |  | Emerging growth company |  | ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of
the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.
7262(b)) by the registered public accounting firm that prepared or issued its audit report.☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the registrant’s common shares (the only common equity of the registrant) held by non-affiliates on the NASDAQ Global Select Market was $353,257,260, based on the closing price of $113.67 on June 30, 2020. For these purposes only, calculation of holdings by non-affiliates is based upon the assumption, that the registrant’s executive officers and directors are affiliates.
The number of shares outstanding of the issuer’s common stock, as of February 25, 2021, is 3,160,419 shares.
Documents Incorporated by Reference
Portions of the registrant’s definitive Proxy Statement for the 2021 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, are incorporated by reference into Part III of this Annual Report on Form 10-K.

Table of Contents
Diamond Hill Investment Group, Inc.
Form 10-K
For the Fiscal Year Ended December 31, 2020
Index

Required Information | Page
Part I | 3
Item 1. Business | 3
Item 1A. Risk Factors | 9
Item 1B. Unresolved Staff Comments | 14
Item 2. Properties | 14
Item 3. Legal Proceedings | 14
Item 4. Mine Safety Disclosures | 15
Part II | 16
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 16
Item 6. Selected Financial Data | 18
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk | 34
Item 8. Financial Statements and Supplementary Data | 35
Item 9. Changes i n and Disagreements w ith Accountants on Accounting and Financial Disclosures | 54
Item 9A. Controls and Procedures | 54
Item 9B. Other Information | 55
Part III | 56
Item 10. Directors, Executive Officers and Corporate Governance | 56
Item 11. Executive Compensation | 56
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 56
Item 13. Certain Relationships and Related Transactions, and Director Independence | 56
Item 14. Principal Accounting Fees and Services | 56
Part IV | 57
Item 15. Exhibits, Financial Statement Schedules | 57
Item 16. Form 10-K Summary | 58
Signatures | 59

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PART I

Item 1. | Business

Forward-Looking Statements
Throughout this Annual Report on Form 10-K and the documents incorporated herein by reference, Diamond Hill Investment Group, Inc. (“Diamond Hill”) may make forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “1933 Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such statements are provided under the “safe harbor” protection of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, statements regarding anticipated operating results, prospects and levels of assets under management, technological developments, economic trends (including interest rates and market volatility), expected transactions and similar matters. The words “believe,” “expect,” “anticipate,” “target,” “project,” “estimate,” “would,” “will,” “continue,” “should,” “hope,” “seek,” “plan,” “intend,” and variations of such words and similar expressions identify such forward-looking statements, which speak only as of the date made. While we believe that the assumptions underlying our forward-looking statements are reasonable, investors are cautioned that any of the assumptions could prove to be inaccurate and, accordingly, our actual results and experiences could differ materially from the anticipated results or other expectations expressed in our forward-looking statements.
Factors that could cause such actual results or experiences to differ from results discussed in the forward-looking statements include, but are not limited to: (i) any reduction in our assets under management (“AUM”); (ii) withdrawal, renegotiation, or termination of investment advisory agreements; (iii) damage to our reputation; (iv) failure to comply with investment guidelines or other contractual requirements; (v) challenges from the competition we face in our business; (vi) adverse regulatory and legal developments; (vii) unfavorable changes in tax laws or limitations; (viii) interruptions in or failure to provide critical technological service by us or third parties; (ix) adverse civil litigation and government investigations or proceedings; (x) risk of loss on our investments; (xi) lack of sufficient capital on satisfactory terms; (xii) losses or costs not covered by insurance; (xiii) impairment of goodwill or intangible assets; (xiv) a decline in the performance of our products; (xv) changes in interest rates; (xvi) changes in national and local economic and political conditions; (xvii) the continuing economic uncertainty in various parts of the world; (xviii) the effects of the COVID-19 pandemic and the actions taken in connection therewith; (xix) political uncertainty caused by, among other things, political parties, economic nationalist sentiments, tensions surrounding the current socioeconomic landscape, and other risks identified from time-to-time in other public documents on file with the U. S. Securities and Exchange Commission (“SEC”), including those discussed below in Item 1A.
We do not undertake or plan to update or revise any such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections, or other circumstances occurring after the date of this Annual Report on Form 10-K, even if such results, changes, or circumstances make it clear that any forward-looking information will not be realized. If there are any future public statements or disclosures by us which modify or impact any of the forward-looking statements contained in or accompanying this Annual Report on Form 10-K, such statements or disclosures will be deemed to modify or supersede such statements in this Annual Report on Form 10-K. Throughout this Annual Report on Form 10-K, when we use the terms the “Company,” “management,” “we,” “us,” and “our,” we mean Diamond Hill and its subsidiaries.
Overview
Diamond Hill, an Ohio corporation organized in April 1990, derives its consolidated revenue and net income from investment advisory and fund administration services provided by its wholly owned subsidiary, Diamond Hill Capital Management, Inc., and Ohio corporation (“DHCM”). DHCM is a registered investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). DHCM sponsors, distributes, and provides investment advisory and related services to clients through the Diamond Hill Funds (each a “Fund”, and collectively, the “Funds”), sub-advised mutual funds, and separately managed accounts.
DHCM is a client-centric organization committed to a set of shared investment principles and core values intended to enable excellent investment outcomes for clients. By committing to valuation disciplined active portfolio management, fundamental bottom-up research, and a long-term business owner mindset, DHCM has created a suite of investment strategies designed for long-term strategic allocations from institutionally-oriented investors. DHCM’s core values of curiosity, ownership, trust, and respect create an environment where investment professionals can focus on results and all teammates focus on the overall client experience. The combination of these investment principles and core values create an aligned boutique model ensuring associates succeed when clients succeed. This alignment with clients is emphasized through: (i) personal investment by Diamond Hill employees in the strategies managed, (ii) a fee philosophy focused on a fair sharing of the economics among clients, employees, and shareholders, (iii) a strict adherence to capacity discipline ensuring the ability to add value for existing clients, and (iv) compensation driven by the value created.
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Our primary objective is to fulfill our fiduciary duty to our clients. Our secondary objective is to grow our intrinsic value to achieve an adequate long-term return for our shareholders.
Investment Advisory Activities
Investment Advisory Fees
Our principal source of revenue is investment advisory fee income earned from managing client accounts under investment advisory and sub-advisory agreements. The fees earned depend on the type of investment strategy, account size, and servicing requirements. Revenues depend on the total value and composition of AUM. Accordingly, net cash flows from clients, market fluctuations in client portfolios, and the composition of AUM impact our revenues and results of operations. We also have certain agreements that allow us to earn performance-based fees if investment returns exceed targeted amounts during a measurement period.
Assets Under Management
The following tables show AUM by product and investment objective, as well as net client cash flows, for each of the past five years ended December 31, 2020:

| Assets Under Management As of December 31,
(in millions) | 2020 |  | 2019 |  | 2018 |  | 2017 |  | 2016
Proprietary funds | $ | 17,615 |  |  | $ | 16,148 |  |  | $ | 13,440 |  |  | $ | 15,974 |  |  | $ | 13,618 |
Sub-advised funds | 3,185 |  |  | 2,029 |  |  | 1,358 |  |  | 1,518 |  |  | 1,445 |
Separately managed accounts | 5,611 |  |  | 5,222 |  |  | 4,310 |  |  | 4,825 |  |  | 4,318 |
Total AUM | $ | 26,411 |  |  | $ | 23,399 |  |  | $ | 19,108 |  |  | $ | 22,317 |  |  | $ | 19,381 |

| Assets Under Management by Investment Strategy As of December 31,
(in millions) | 2020 |  | 2019 |  | 2018 |  | 2017 |  | 2016
Small Cap | $ | 556 |  |  | $ | 795 |  |  | $ | 1,048 |  |  | $ | 1,525 |  |  | $ | 1,843 |
Small-Mid Cap | 2,810 |  |  | 3,243 |  |  | 2,770 |  |  | 3,528 |  |  | 3,329 |
Mid Cap | 992 |  |  | 569 |  |  | 143 |  |  | 130 |  |  | 59 |
Large Cap | 15,075 |  |  | 12,316 |  |  | 9,611 |  |  | 10,864 |  |  | 8,494 |
Large Cap Concentrated | 27 |  |  | 28 |  |  | 26 |  |  | 3 |  |  | 3 |
All Cap Select | 446 |  |  | 528 |  |  | 432 |  |  | 444 |  |  | 402 |
Long-Short | 2,056 |  |  | 3,605 |  |  | 3,767 |  |  | 4,980 |  |  | 4,613 |
Global/International | 33 |  |  | 35 |  |  | 18 |  |  | 6 |  |  | 2 |
Total Equity | 21,995 |  |  | 21,119 |  |  | 17,815 |  |  | 21,480 |  |  | 18,745 |
Short Duration Securitized Bond | 1,132 |  |  | 809 |  |  | 579 |  |  | 313 |  |  | 197 |
Core Fixed Income | 541 |  |  | 300 |  |  | 55 |  |  | 44 |  |  | 40 |
Long Duration Treasury | 62 |  |  | 52 |  |  | 52 |  |  | — |  |  | — |
Corporate Credit | 2,020 |  |  | 1,147 |  |  | 757 |  |  | 668 |  |  | 549 |
High Yield | 724 |  |  | 135 |  |  | 54 |  |  | 31 |  |  | 32 |
Total Fixed Income | 4,479 |  |  | 2,443 |  |  | 1,497 |  |  | 1,056 |  |  | 818 |
Total Equity and Fixed Income | 26,474 |  |  | 23,562 |  |  | 19,312 |  |  | 22,536 |  |  | 19,563 |
(Less: Investments in affiliated funds)(a) | (63) |  |  | (163) |  |  | (204) |  |  | (219) |  |  | (182) |
Total AUM | $ | 26,411 |  |  | $ | 23,399 |  |  | $ | 19,108 |  |  | $ | 22,317 |  |  | $ | 19,381 |

(a) Certain of the Funds own shares of the Diamond Hill Short Duration Securitized Bond Fund. The Company reduces its total AUM by these investments held in this affiliated fund.
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| Change in Assets Under Management For the Year Ended December 31,
(in millions) | 2020 |  | 2019 |  | 2018 |  | 2017 |  | 2016
AUM at beginning of the year | $ | 23,399 |  |  | $ | 19,108 |  |  | $ | 22,317 |  |  | $ | 19,381 |  |  | $ | 16,841 |
Net cash inflows (outflows) |  |  |  |  |  |  |  |  |
proprietary funds | 879 |  |  | (499) |  |  | (978) |  |  | 843 |  |  | 548 |
sub-advised funds | 713 |  |  | 216 |  |  | (25) |  |  | (164) |  |  | 639 |
separately managed accounts | (63) |  |  | (394) |  |  | (99) |  |  | (254) |  |  | (1,023) |
| 1,529 |  |  | (677) |  |  | (1,102) |  |  | 425 |  |  | 164 |
Net market appreciation/(depreciation) and income | 1,483 |  |  | 4,968 |  |  | (2,107) |  |  | 2,511 |  |  | 2,376 |
Increase (decrease) during the year | 3,012 |  |  | 4,291 |  |  | (3,209) |  |  | 2,936 |  |  | 2,540 |
AUM at end of the year | $ | 26,411 |  |  | $ | 23,399 |  |  | $ | 19,108 |  |  | $ | 22,317 |  |  | $ | 19,381 |

Capacity
Our ability to retain and grow our AUM has been, and will be, primarily driven by delivering attractive long-term investment results, which requires strict adherence to capacity discipline. In the event that we determine that the size of a strategy could begin to hinder our ability to add value for our clients based on the strategy’s investment return goals, we will close that strategy to new clients. Our commitment to capacity discipline inherently impacts our ability to grow our AUM. Investment results will always be prioritized over asset accumulation. As of December 31, 2020, our Small-Mid Cap strategy remains closed to new investors. We anticipate closing our Large Cap strategy to most new investors by the end of the first quarter of 2021.
Total capacity is estimated to be $30 – 40 billion for our existing domestic equity strategies, at least $15 billion for our International and Global strategies, and at least $40 billion for our existing fixed income strategies. Total firm capacity is not the sum of the individual strategy capacities as it is affected by overlap of investment opportunity across strategies. Firm level capacity increases with the development of new products or strategies.
Growth Strategy
As a deliberately capacity constrained organization, growth is intentional and centers first and foremost on delivering an investment and client experience that enables investors to have better outcomes over the long term. Our core values and aligned boutique model encourage development of strategies and vehicles that are designed to meet clients’ objectives and embody our shared investment principles.
There is ample opportunity for growth within more recently developed strategies. In 2021, the International, Core Bond, and Short Duration Securitized Bond strategies will reach their five-year track records. All three strategies have shown the ability to exceed their investment objectives and serve important strategic roles in client portfolios.
There are three natural extensions of our current strategies that we will expand on in early 2021. We will extend our Large Cap Concentrated strategy to be available as a new fund in our Diamond Hill Funds lineup. We will launch a limited partnership focused on micro-cap companies allowing us to leverage our experience evaluating small publicly traded business. We are also working on the expansion of our fixed income separate account offerings with additional securitized bond strategies. We continue to develop and identify new long-term oriented investment offerings that meet client objectives and align with our investment principles.
We provide investment advisory services primarily to institutions and through intermediaries who utilize institutional decision-making processes. We look to attract like-minded, long-term focused clients across all our offerings. We have dedicated resources to developing distribution technology and content led marketing efforts. These initiatives supplement and make more efficient the business development and relationship management efforts. We believe the combination of all these efforts will lead to a deeper understanding of our investment strategies and ultimately longer holding periods for investors.
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Distribution Channels
Our investment advisory services are distributed through multiple channels. Below is a summary of AUM by distribution channel for each of the five years ended December 31, 2020:

| AUM by Distribution Channel As of December 31, |
(in millions) | 2020 |  | 2019 |  | 2018 |  | 2017 |  | 2016 |
Proprietary funds: |  |  |  |  |  |  |  |  |  |
Registered investment adviser | $ | 4,315 |  |  | $ | 3,603 |  |  | $ | 3,243 |  |  | $ | 4,010 |  |  | $ | 3,508 |  |
Independent broker-dealer | 4,274 |  |  | 3,563 |  |  | 2,900 |  |  | 3,581 |  |  | 2,922 |  |
Wirehouse | 3,529 |  |  | 3,026 |  |  | 2,319 |  |  | 2,660 |  |  | 2,011 |  |
Bank Trust | 2,546 |  |  | 2,907 |  |  | 2,672 |  |  | 3,456 |  |  | 3,175 |  |
Defined contribution | 2,716 |  |  | 2,723 |  |  | 1,904 |  |  | 1,840 |  |  | 1,535 |  |
Other | 235 |  |  | 326 |  |  | 402 |  |  | 427 |  |  | 467 |  |
Total proprietary funds | 17,615 |  |  | 16,148 |  |  | 13,440 |  |  | 15,974 |  |  | 13,618 |  |
Sub-advised funds | 3,185 |  |  | 2,029 |  |  | 1,358 |  |  | 1,518 |  |  | 1,445 |  |
Separately managed accounts: |  |  |  |  |  |  |  |  |  |
Institutional consultant | 2,504 |  |  | 2,397 |  |  | 2,122 |  |  | 2,357 |  |  | 2,074 |  |
Financial intermediary | 2,371 |  |  | 1,777 |  |  | 1,506 |  |  | 1,691 |  |  | 1,358 |  |
Direct | 736 |  |  | 1,048 |  |  | 682 |  |  | 777 |  |  | 886 |  |
Total separately managed accounts | 5,611 |  |  | 5,222 |  |  | 4,310 |  |  | 4,825 |  |  | 4,318 |  |
Total AUM | $ | 26,411 |  |  | $ | 23,399 |  |  | $ | 19,108 |  |  | $ | 22,317 |  |  | $ | 19,381 |  |

Fund Administration Activities
We provide fund administration services to the Funds. Fund administration services are broadly defined in our administration agreements with the Funds as portfolio and regulatory compliance, treasury and financial oversight, oversight of back-office service providers, such as the custodian, fund accountant, and transfer agent, and general business management and governance of the mutual fund complex.
Competition
Competition in the investment management industry is intense, and competitors include investment management firms, broker-dealers, banks, and insurance companies, some of whom offer various investment alternatives, including passive index strategies. Many competitors are better known, offer a broader range of investment products, and have more dedicated resources for business development and marketing.
Regulation
Our firm and business are subject to various federal, state, and non-U.S. laws and regulations. As a matter of public policy, regulatory bodies are charged with safeguarding the integrity of the securities and other financial markets and with protecting the interests of participants in those markets, including investment advisory clients and shareholders of investment funds. If an adviser fails to comply with these laws and regulations, agencies that regulate investment advisers have broad administrative powers, including the power to limit, restrict, or prohibit an investment adviser from carrying on its business. Possible sanctions that regulatory bodies may impose, include civil and criminal liability, the suspension of individual employees, limitations on engaging in certain lines of business for specified periods of time, revocation of investment adviser, broker-dealer, and other registrations, censures, and fines.
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DHCM is registered with the SEC under the Advisers Act and operates in a highly regulated environment. The Advisers Act imposes numerous obligations on registered investment advisers, including fiduciary duties, recordkeeping requirements, operational requirements, and disclosure obligations. All Funds are registered with the SEC under the Investment Company Act of 1940, as amended (the “1940 Act”), and are required to make notice filings with all states where the Funds are offered for sale. Virtually all aspects of our investment advisory and fund administration business are subject to various federal and state laws and regulations.
DHCM is a “fiduciary” under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), with respect to benefit plan clients, and therefore, is subject to ERISA regulations. ERISA and applicable provisions of the Internal Revenue Code of 1986, as amended, impose certain duties on persons who are fiduciaries, prohibit certain transactions involving ERISA plan clients, and provide monetary penalties for violations of these prohibitions. The U.S. Department of Labor, which administers ERISA, has been increasingly active in proposing and adopting regulations affecting the asset management industry.
Our trading activities for client accounts are regulated by the SEC under the Exchange Act, which includes regulations governing trading on inside information, market manipulation, and a broad number of trading and market regulation requirements in the United States (e.g., volume limitations and reporting obligations).
The preceding descriptions of the regulatory and statutory provisions applicable to us are not exhaustive or complete and are qualified in their entirety by reference to their respective statutory or regulatory provisions. Failure to comply with these requirements could have a material adverse effect on our business.
Contractual Relationships with the Funds
We are highly dependent on our contractual relationships with the Funds. If any of our advisory or administration agreements with the Funds were terminated or not renewed, or were amended or modified to reduce fees, we would be materially and adversely affected. We generated approximately 75%, 77%, and 79% of our 2020, 2019, and 2018 revenues, respectively, from our advisory and administrative contracts with the Funds. We believe that we have a strong relationship with the Funds and their board of trustees, and we have no reason to believe that these advisory or administration contracts will not be renewed in the future. However, there is no assurance that the Funds will choose to continue their relationships with us. Please see Item 1A for risk factors regarding this relationship.
Human Capital
Our people are our greatest asset, and each role within our firm contributes to our mission to deliver outstanding client outcomes. As our greatest asset, we diligently care for and invest in our employees. We are a small firm with an important purpose, and we rely on each other and our positive culture to create the environment which allows us to deliver on our vision.
Workforce Data
Attracting, developing, and retaining talented employees is an integral aspect of our human capital strategy and critical to our success. We depend on highly skilled personnel, both investment professionals and business professionals, many of whom have specialized expertise and extensive experience in the investment management industry. As of December 31, 2020, we employed 126 full-time equivalent employees. As of December 31, 2019, the number of full-time equivalent employees was 129.
Our average employee tenure is approximately 6 years, and more than 20% of our employees have been employed by us for more than ten years. Our employee turnover rate continues to be well below industry average. We believe these realities reflect employees’ genuine commitment to our clients, our business, and each other, as well as our firm’s value proposition.
Competitive Pay and Benefits
Since our founding, aligning our interests directly with the clients we serve has been imperative. Inherent in this alignment is a passion for excellence enabling us to exceed client expectations. To achieve this level of excellence, it is important that consistent with our compensation philosophy, we attract, retain, and motivate associates who embody our values, act like owners, and advocate for client outcomes. We align our employees’ compensation with our overall performance, as well as team and individual results.
We know there are many places exceptional talent can choose to work, which is why we aim to take exceptional care of our employees throughout their career. We believe that their well-being and financial security will enable them to do their best work and advocate for client outcomes. Some of our most competitive package components are:
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•Competitive annual compensation comprised of a base salary, discretionary cash incentive compensation and, for certain roles, a long-term equity incentive;
•An equity grant in the first year of joining our firm to instill an ownership mindset;
•A market-leading 401k match program; and
•Employees are also eligible for health, dental and vision insurance, health savings accounts, telemedicine, flexible time off, paid and unpaid leave, life and disability insurance, paid parental leave, fertility benefits, a wellness program with subsidized gym membership, professional development opportunities including reimbursement for job-related professional designations such as the CFA program, and paid parking.
Our Culture
The way our employees embody our core values creates an exceptional corporate culture that differentiates our business from other firms.
Our culture revolves around the fact that Diamond Hill is a fiduciary first and foremost. Our primary focus is serving our clients and this mindset permeates our organization. We intentionally staff our team to ensure a high level of service to our clients, and we believe our client-centric approach is difficult for competitors to replicate. Our long-term, value-disciplined investment philosophy and process are foundational to who we are as an organization and have been consistently implemented since the firm’s inception. All members of the investment team believe in, and adhere to, the same philosophy. As a result, our investment professionals focus their efforts solely on finding attractive investment opportunities for clients.
Our employees also invest in our strategies alongside our clients. Our portfolio managers have significant personal investments in the strategies they manage. In addition, DHCM’s Code of Ethics states that all Diamond Hill employees are prohibited from investing in individual securities or competing firms’ funds in segments of the market in which Diamond Hill has an investment strategy. This limitation ensures we continue to focus on finding the best opportunities for client portfolios while avoiding the conflicts of interest inherent in managing personal accounts.
To further ensure our portfolio managers consistently remain focused on achieving the best long-term outcomes possible for our clients, we link the majority of portfolio managers’ annual incentive compensation to trailing five-year investment results of the strategies they manage. We believe that we are one of few firms to focus only on long-term performance, with no separate consideration for one- or three-year returns in evaluating portfolio managers. This approach ensures that our portfolio managers are motivated to make sound long-term investment decisions, rather than on achieving a particular short-term return goal.
Diversity, Equity, and Inclusion
We view diversity, equity, and inclusion (“DEI”) as essential parts of our business and operating model to ensure sustainability. Diversity, equity, and inclusion are embedded in our policies, practices, strategic initiatives, and are linked to our firm’s core values.
We believe our goal of being an exceptional active investment boutique that our clients trust to deliver excellent long-term investment outcomes is better served by the engagement and encouragement of varied perspectives in decision making as is inherent in a diverse team.
With that vision in mind, in 2020, we committed to several DEI initiatives and measures to ensure our efforts are sustained and positive changes occur within our firm, in the industry, and within our community. More specifically, in 2020:
•Along with 750+ other Columbus, Ohio-based business leaders, we signed a letter supporting a Columbus City Council resolution declaring racism a public health issue;
•We created an employee-led, DEI advisory group to help guide and prioritize our DEI efforts and ensure our ideas become actions;
•Approximately 30% of employees from across the firm have volunteered to be part of our DEI efforts;
•We partnered with third parties to increase the number of diverse candidates applying for our open positions and to ensure that we consider a diverse pool of candidates for our full-time and part-time openings and within our intern program;
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•We partnered with organizations that assist people of color and women to achieve inclusion in the financial services industry and support financial and investment literacy;
•We are working to ensure that we are conducting business with vendors who embrace our commitment to DEI;
•We created a DEI resource group to raise awareness about a variety of topics and foster understanding; and
•At the community level, we pledged $1 million over the next five years to organizations that support anti-racism and DEI efforts.
We believe we should all be held to a higher standard and we pledge our commitment to do so. As of December 31, 2020, females represent 42% of our Board of Directors, 66% of our management team, and 30% of our employees. As of December 31, 2020, minorities represent approximately 14% of our workforce.
Health and Well-Being
Conducting business in the COVID-19 era has heightened the importance of protecting employee health and well-being and has inspired new ways of engaging with a physically distanced workforce. We more acutely recognize the importance of being supportive, open, and flexible in order to retain our great people.
We recognize that individual circumstances are unique and evolving, and that flexible working is a part of our future. We are committed to offering flexibility to our employees to ensure their well-being, safety, and productivity. We support managers and employees by providing training and mental health support including confidential counseling services, and are continuously exploring new ways of collaborating.
Employee Development / Training
We offer both formal and informal training programs to foster and retain talent. The challenges of 2020 reinforced our belief that continuous learning is vital, far beyond our typical functional scope. Despite the majority of our employees being based in Columbus, Ohio and accustomed to working in the office with access to desktops and desk phones, the COVID-19 pandemic required our business to adapt quickly and seamlessly to new technologies, new hardware and software, and to learn various collaboration tools. In 2020, we also offered LinkedIn Learning licenses to supplement internal and external training.
SEC Filings
We maintain an Internet website at www.diamond-hill.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports that we file or furnish from time-to-time pursuant to Section 13(a) or 15(d) of the Exchange Act, are made available free of charge, on or through our website, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. These filings are also available on the SEC’s website at http://www.sec.gov free of charge.

ITEM 1A. | Risk Factors

Our future results of operations, financial condition, liquidity, and capital resources, as well as the market price of our common stock, are subject to various risks, including those risks mentioned below and those risks that are discussed from time-to-time in our other periodic filings with the SEC. Investors should carefully consider these risks, along with the other information contained in this Annual Report on Form 10-K, before making an investment decision regarding our common shares. There may be additional risks of which we are currently unaware, or which we currently consider immaterial. The occurrence of any of these risks could have a material adverse effect on our financial condition, results of operations, liquidity, capital resources and the value of our common stock. Please see “Forward Looking Statements” within Part I, Item 1, of this Annual Report on Form 10-K.
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Business Risks
Poor investment results or adverse reviews of our products could affect our ability to attract new clients or reduce our AUM, potentially negatively impacting revenue and net income.
If we fail to deliver acceptable investment results for our clients, both in the short and long term, we could experience diminished investor interest and a decreased level of AUM.
Investment strategies are assessed and rated by independent third parties, including rating agencies, industry analysts, and publications. Investors can be influenced by such ratings. If a strategy receives an adverse report, it could negatively influence our AUM and our revenue.
Our success depends on our key personnel, and our financial performance could be negatively affected by the loss of their services.
Our success depends on highly skilled personnel, including portfolio managers, research analysts, and management, many of whom have specialized expertise and extensive experience in the investment management industry. Financial services professionals are in high demand, and we face significant competition for qualified employees. Other than our Chief Executive Officer, our employees do not have employment contracts and generally can terminate their employment at any time. We may not be able to retain or replace key personnel. In order to retain or replace our key personnel, we may be required to increase compensation, which would decrease net income. The loss of key personnel could damage our reputation and make it more difficult to retain and attract new employees and clients. A loss of client assets resulting from the departure of key personnel may materially decrease our revenues and net income.
Our investment results and/or the growth in our AUM may be constrained if appropriate investment opportunities are not available or if we close certain of our investment strategies to new investors.
Our ability to deliver strong investment results depends in large part on our ability to identify appropriate investment opportunities in which to invest client assets. If we are unable to identify sufficient investment opportunities for existing and new client assets on a timely basis, our investment results could be adversely affected. The risk that appropriate investment opportunities may be unavailable is influenced by a number of factors, including general market conditions, and is likely to increase if our AUM increases rapidly. In addition, if we determine that sufficient investment opportunities are not available for an investment strategy, or we believe that it is necessary in order to continue to produce attractive returns from an investment strategy, we will consider closing the investment strategy to new investors. As of December 31, 2020, we have one investment strategy closed to new investors. If we misjudge the point at which it would be optimal to close an investment strategy, the investment results of the strategy could be negatively impacted.
We are subject to substantial competition in all aspects of our business.
Our investment products compete against investment products and services from:
•Asset management firms;
•Mutual fund companies;
•Commercial banks and thrift institutions;
•Insurance companies;
•Exchange traded funds;
•Private funds, including hedge funds and private equity funds; and
•Brokerage and investment banking firms.
Many of our competitors have substantially greater resources and may operate in more markets or offer a broader range of products, including passively managed or “index” products. Some of these institutions operate in a different regulatory environment, which may give them certain competitive advantages in the investment products and portfolio structures that they offer. We compete with other providers of investment services primarily based upon our philosophy, performance, and client service. Some institutions have a broader array of products and distribution channels, which makes it more difficult for us to compete. If current or potential customers decide to use one of our competitors, we could face a significant decline in market share, AUM, revenues, and net income. If we are required to lower our fees to remain competitive, our net income could be significantly reduced because some of our expenses are fixed, especially over shorter periods of time, and our expenses may not decrease in proportion to the decrease in revenues. Additionally, over the past several years, investors have
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generally shown a preference for passive investment products, such as index and exchange traded funds, over actively managed strategies. If this trend continues, our AUM may be negatively impacted.
Market and competitive pressures in recent years have created a trend towards lower management fees in the asset management industry and there can be no assurance that we will be able to maintain our current fee structure. As a result, a shift in our AUM from higher to lower fee generating clients and strategies could result in a decrease in profitability even if our AUM increases or remains unchanged.
The loss of access to, or increased fees required by, third-party distribution sources to market our portfolios and access our client base could adversely affect our results of operations.
Our ability to attract additional AUM is dependent on our relationship with third-party financial intermediaries. We compensate some of these intermediaries for access to investors and for various marketing services provided. These distribution sources and client bases may not continue to be accessible to us for reasonable terms, or at all. If such access is restricted or eliminated, it could have an adverse effect on our results of operations. Fees paid to financial intermediaries for investor access and marketing services have generally increased in recent years. If such fee increases continue, refusal to pay them could restrict our access to those client bases while paying them could adversely affect our profitability.
A significant portion of our revenues are based on advisory and administrative agreements with the Funds that are subject to termination without cause and on short notice.
We are highly dependent on our contractual relationships with the Funds. If our advisory or administration agreements with the Funds were terminated or not renewed, or were amended or modified to reduce fees, we would be materially and adversely affected. Generally, these agreements are terminable by either party upon 60 days’ prior written notice without penalty. The agreements are subject to annual approval by either: (i) the board of trustees of the Funds, or (ii) a vote of the majority of the outstanding voting securities of each Fund. These agreements automatically terminate in the event of their assignment by either us or the Funds. We generated approximately 75%, 77%, and 79% of our 2020, 2019, and 2018 revenues, respectively, from our advisory and administrative contracts with the Funds, including 26%, 17%, and 11% from the advisory contracts with the Diamond Hill Large Cap Fund, the Diamond Hill Long-Short Fund, and the Diamond Hill Small-Mid Cap Fund, respectively, during 2020. The loss of any of the Diamond Hill Large Cap Fund, the Diamond Hill Long-Short Fund, or the Diamond Hill Small-Mid Cap Fund contracts would have a material adverse effect on us. We believe that we have a strong relationship with the Funds and their boards of trustees, and we have no reason to believe that these advisory or administration contracts will not be renewed in the future. However, there can be no assurance that the Funds will choose to continue their relationships with us.
The COVID-19 pandemic and other possible similar pandemics or outbreaks could have a material adverse effect on our business, financial position, results of operations, and cash flows.
COVID-19 has resulted in temporary, and sometimes prolonged, closures of many corporate offices, retail stores, manufacturing facilities, and factories around the world. In addition, as COVID-19 continues to spread across the globe, supply chains worldwide have been interrupted, slowed, or rendered inoperable, and an increasing number of individuals have and may continue to become ill, quarantined, or otherwise unable to work and/or travel due to health reasons or governmental restrictions. Governmental mandates to control the outbreak may require additional forced shutdowns and limit the re-opening of various business facilities for extended or indefinite periods. COVID-19, and the various governmental, industry, and consumer actions related to the containment thereof, are having, and could continue to have, negative effects on our business and risk exposure. These effects include, without limitation, potential significant financial market volatility, decreases in the demand for our investment products, changes in consumer behavior and preferences, limitations on our employees’ ability to work and travel, potential financial and operational difficulties of vendors and suppliers, significant changes in economic or political conditions, and financial market declines or recessions that could generally negatively affect the level of our AUM and consequently our revenue, investment income (loss), and net income.
The global effect of the COVID-19 pandemic continues to evolve, and it is uncertain what the effect of various legislative and other responses that have been taken, and that may be taken in the future in the United States and other countries, will have on the economy, financial markets, international trade, our industries, our businesses, and the businesses of our clients and vendors. Many countries, including the United States, have reacted to both the initial outbreak and subsequent outbreaks by instituting quarantines and restrictions on travel to and from actual and potentially affected areas, and the outbreak could have a continued adverse effect on economic and market conditions. The future effect of the COVID-19 pandemic on global markets is difficult to predict, and it is uncertain the extent to which the COVID-19 pandemic may negatively affect our operating results or disrupt the duration of any potential business. The emergence of new variants of the virus and delay or difficulties in administering vaccines could continue to cause uncertainty. Any potential effect on our business and results of operations will depend to a large extent on future developments and new information that may emerge regarding the duration and severity of
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the COVID-19 pandemic and the actions taken by authorities and other entities to contain the spread of the virus, all of which are beyond our control.
In addition, the COVID-19 pandemic has significantly affected the way we operate. While we have in place business continuity plans that address the impact of the COVID-19 pandemic on our personnel, facilities, and technologies that enable our personnel to work effectively from home, no assurance can be given that the steps we have taken will continue to be effective or appropriate. Although our employees have been able to continue conducting business while working remotely for an extended period of time, operational challenges may arise in the future, which may reduce our organizational efficiency or effectiveness, and increase operational, compliance, and cybersecurity risks. In addition, because most of our employees have not previously worked remotely for such an extended period of time, we are unsure of the impact that the remote work environment and lack of in-person meetings with colleagues, clients, and business partners will have on the growth of our business and the results of our operations. Many of our key service providers also have transitioned to working remotely for an extended period of time. If we or they were to experience material disruptions in the ability of our or their employees to work remotely (e.g., from illness due to the COVID-19 pandemic or disruption in internet-based communication systems and networks), our ability to operate our business could be materially adversely disrupted. Any such disruptions could have a material adverse impact on our results of operations, cash flows, financial condition, and/or reputation.
Moreover, our future success and profitability substantially depend on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to COVID-19 or any similar pandemic could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.
Even after the COVID-19 pandemic subsides, local and foreign economies will likely require time to recover, the length of which is unknown and during which the United States or other countries may experience a recession. Our business could be materially and adversely affected by any such recession.
To the extent the effects of COVID-19 adversely impact our business, financial condition, liquidity, capital resources, or results of operations, it may also have the effect of heightening many of the other risks described in this section.
Operational Risks
Unauthorized disclosure of sensitive or confidential client or customer information, whether through a breach of our computer or other systems or otherwise, could severely harm our business.
As part of our business, we collect, process, and transmit sensitive and confidential information about our clients and employees, as well as proprietary information about our business. We have policies and procedures pursuant to which we take numerous security measures to prevent cyberattacks of various kinds as well as fraudulent and inadvertent activity by persons who have been granted access to such confidential information. Nevertheless, our systems, like all technology systems, remain vulnerable to unauthorized access, which can result in theft or corruption of information. In addition, we share information with third parties upon whom we rely for various functions. The systems of such third parties also are vulnerable to cyber threats. Attacks can come from unrelated third parties through the internet, from access to hardware removed from our premises or those of third parties or from employees acting intentionally or inadvertently.
Cybersecurity incidents can involve, among other things: (i) deliberate attacks designed to corrupt our information systems and make them unusable by us to operate our business; (ii) theft of information used by the perpetrators for financial and other gain; or (iii) inadvertent releases of information by employees or third parties with whom we do business.
Cyberattacks that corrupt our information systems and make them unusable could impair our ability to trade securities in our clients’ accounts. Corruption of the systems of our third-party vendors could impact us to the same extent as corruption of our own systems. If information about our employees is intentionally stolen or inadvertently made public, that information could be used to commit identity theft, obtain credit in an employee’s name, or steal from an employee. If information about our business is obtained by unauthorized persons, whether through intentional attacks or inadvertent releases of information, it could be used to harm our competitive position.
Whether information is corrupted, stolen, or inadvertently disclosed, and regardless of the type and nature of the information (e.g., proprietary information about our business or personal information about clients or employees), the results could be multiple and materially harmful to us, including the following:
•Our reputation could be harmed, resulting in the loss of clients, vendors, and employees or making payments or concessions to such persons to maintain our relationships with them;
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•Our inability to operate our business fully, even if temporarily, and thus, fulfill contracts with clients or vendors, could result in terminations of contracts and loss of revenue;
•Harm suffered by clients or vendors whose contracts have been breached, or by clients, vendors, or employees whose information is compromised, could result in costly litigation against us;
•Our need to focus attention on remediation of a cyber problem could take our attention away from the operation of our business, resulting in lost revenue;
•We could incur costs to repair systems made inoperable by a cyberattack and to make changes to our systems to reduce future cyber threats. Those changes could include, among other things, obtaining additional technologies as well as employing additional personnel and training employees; and
•The interruption of our business or theft of proprietary information could harm our ability to compete.
All of the above potential impacts of a cybersecurity incident could have a material adverse effect on our business, financial condition, and results of operations.
We may not be able to adapt to technological change.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers while reducing costs. Our future success depends, in part, upon our ability to address customer needs by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. We may not be able to implement effectively new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological changes affecting the financial services industry could negatively affect our growth, revenue, and profit.
Operational risks may disrupt our business, result in losses, or limit our growth.
We are dependent on the capacity and reliability of the communications, information and technology systems supporting our operations, whether developed, owned, or operated internally by us or by third parties. Operational risks, such as trading or operational errors, interruption of our financial, accounting, trading, compliance and other data processing systems, the loss of data contained in such systems, or compromised systems due to cyberattack, could result in a disruption of our business, liability to clients, regulatory intervention, or reputational damage, and thus, adversely affect our business.
Negative public opinion can result from our actual or alleged conduct in any number of activities, including trading practices, corporate governance and acquisitions, social media and other marketing activities and from actions taken by governmental regulators and community organizations in response to any of the foregoing. Negative public opinion could adversely affect our ability to attract and maintain clients, could expose us to potential litigation or regulatory action, and could have a material adverse effect on our stock price or result in heightened volatility.
Trading in our common shares is limited, which may adversely affect the time and the price at which you can sell your shares.
Although our common shares are listed on the NASDAQ Global Select Market, the shares are held by a relatively small number of shareholders, and trading in our common shares is relatively inactive. The spread between the bid and the asked prices is often wide. As a result, shareholders may not be able to sell their shares on short notice, and the sale of a large number of shares at one time could temporarily depress the market price. In addition, certain shareholders, including certain of our directors and officers, own a significant number of shares. The sale of a large number of shares by any such individual could temporarily depress the market price of our shares.
Industry, Market, and Economic Risks
Our AUM, which impacts revenue, is subject to significant fluctuations.
The majority of our revenue is calculated as a percentage of AUM or is related to the general performance of the equity securities markets. A decline in securities prices or in the sale of investment products, or an increase in fund redemptions, generally will reduce revenue and net income. Financial market declines will generally negatively impact the level of our AUM, and consequently, our revenue and net income. A recession or other economic or political events, whether in the United States or globally, could also adversely impact our revenue, if such events led to a decreased demand for products, a higher redemption rate, or a decline in securities prices.
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Our investment approach may underperform other investment approaches during certain market conditions.
Our investment strategies are best suited for investors with long-term investment time horizons. Our investment strategies may not perform well during certain periods of time. Additionally, we could have common positions and industry concentrations across our strategies at the same time. As such, factors leading to underperformance may impact multiple strategies simultaneously.
Our investment income and asset levels may be negatively impacted by fluctuations in our investment portfolio.
We currently have a substantial portion of our assets invested in investments that we sponsor. All of these investments are subject to market risk and our non-operating investment income could be adversely affected by adverse market performance. Fluctuations in investment income are expected to occur in the future.
Regulatory Risks
Changes in tax laws and unanticipated tax obligations could have an adverse impact on our financial condition, results of operations, and cash flow.
We are subject to federal, state, and local income taxes in the United States. Tax authorities may disagree with certain positions we have taken or implement changes in tax policy, which may result in the assessment of additional taxes. We regularly assess the appropriateness of our tax positions and reporting. We cannot provide assurances, however, that we will accurately predict the outcomes of audits, and the actual outcomes of these audits could be unfavorable.
Our business is subject to substantial governmental regulation, which can change frequently and may increase costs of compliance, reduce revenue, result in fines, penalties, and lawsuits for noncompliance, and adversely affect our results of operations and financial condition.
Our business is subject to a variety of federal securities laws, including the Advisers Act, the 1940 Act, the 1933 Act, the Exchange Act, the Sarbanes-Oxley Act of 2002, the U.S. PATRIOT Act of 2001, and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. In addition, we are subject to significant regulation and oversight by the SEC. Changes in legal, regulatory, accounting, tax, and compliance requirements could have a significant effect on our operations and results, including, but not limited to, increased expenses and reduced investor interest in certain Funds and other investment products we offer. We continually monitor legislative, tax, regulatory, accounting, and compliance developments that could impact our business. We and our directors, officers, and employees could be subject to lawsuits or regulatory proceedings for violations of such laws and regulations, which could result in the payment of fines or penalties and cause reputational harm to us which could negatively affect our financial condition and results of operations, as well as divert management’s attention from our operations.
General Risk Factors
Our insurance policies may not cover all losses and costs to which we may be exposed.
We carry insurance in amounts and under terms that we believe are appropriate. Our insurance may not cover all liabilities and losses to which we may be exposed. Certain insurance coverage may not be available or may be prohibitively expensive in future periods. As our insurance policies come up for renewal, we may need to assume higher deductibles or pay higher premiums, which could have an adverse impact on our results of operations and financial condition.

ITEM 1B. | Unresolved Staff Comments

None.

ITEM 2. | Properties

We lease office space and conduct our general operations at one location, the address of which is 325 John H. McConnell Boulevard, Suite 200, Columbus, Ohio 43215.
We do not own any real estate or interests in real estate.

ITEM 3. | Legal Proceedings

There are currently no matters pending that we believe could have a material adverse effect on our consolidated financial statements.
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ITEM 4. | Mine Safety Disclosures

Not applicable.
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PART II

ITEM 5. | Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

The following performance graph compares the total shareholder return of an investment in our common shares to that of the Russell Microcap® Index, and to a peer group index of publicly-traded asset management firms for the five-year period ended on December 31, 2020. The graph assumes that the value of the investment in our common shares and each index was $100 on December 31, 2015. Total return includes reinvestment of all dividends. The Russell Microcap® Index makes up less than 3% of the U.S. equity market and is a market-value-weighted index of the smallest 1,000 securities in the small-cap Russell 2000® Index plus the next 1,000 smallest securities. Peer Group returns are weighted by the market capitalization of each firm at the beginning of the measurement period. The historical information set forth below is not necessarily indicative of future performance. We do not make or endorse any predictions as to future stock performance.

| 12/31/2015 |  | 12/31/2016 |  | 12/31/2017 |  | 12/31/2018 |  | 12/31/2019 |  | 12/31/2020 | Cumulative 5 Year Total Return
Diamond Hill Investment Group, Inc. | $100 |  | $114 |  | $116 |  | $89 |  | $89 |  | $102 | 2 | %
Russell Microcap® Index | $100 |  | $120 |  | $136 |  | $118 |  | $145 |  | $175 | 75 | %
Peer Group* | $100 |  | $90 |  | $114 |  | $72 |  | $81 |  | $97 | (3) | %

* The Peer Group is based upon all publicly-traded asset managers with market cap of less than $5 billion excluding: (i) firms whose primary business is hedge fund or private equity, and (ii) firms with multiple lines of business. The following companies are included in the Peer Group: Alliance Bernstein Holding L.P., Affiliated Managers Group, Inc., Artisan Partners Asset Management Inc., Cohen & Steers, Inc., Federated Investors, Inc., GAMCO Investors, Inc., Hennessy Advisors, Inc., Manning & Napier, Inc., Pzena Investment Management, Inc., Teton Advisors, Inc., U.S. Global Investors, Inc., Virtus Investment Partners, Inc., Waddell & Reed Financial, Inc., Wisdomtree Investments, Inc., and Westwood Holdings Group, Inc.
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Our common shares trade on the NASDAQ Global Select Market under the ticker symbol DHIL. The following table sets forth the high and low daily close prices during each quarter of 2020 and 2019:

| 2020 |  | 2019
| High Price |  | Low Price |  | Dividend Per Share |  | High Price |  | Low Price |  | Dividend Per Share
Quarter ended: |  |  |  |  |  |  |  |  |  |  |
March 31 | $ | 144.40 |  |  | $ | 81.70 |  |  | $ | — |  |  | $ | 158.74 |  |  | $ | 133.52 |  |  | $ | — |
June 30 | $ | 122.13 |  |  | $ | 86.00 |  |  | $ | — |  |  | $ | 148.30 |  |  | $ | 137.73 |  |  | $ | — |
September 30 | $ | 128.08 |  |  | $ | 111.80 |  |  | $ | — |  |  | $ | 142.80 |  |  | $ | 127.18 |  |  | $ | — |
December 31 | $ | 160.00 |  |  | $ | 128.01 |  |  | $ | 12.00 |  |  | $ | 149.60 |  |  | $ | 132.70 |  |  | $ | 9.00 |

Due to the relatively low trading volume of our shares, bid/ask spreads can be wide at times, and therefore, quoted prices may not be indicative of the price a shareholder may receive in an actual transaction. During the years ended December 31, 2020 and 2019, approximately 4,331,369 and 4,384,590, of our common shares were traded, respectively. The dividends indicated above were special dividends.
On October 27, 2020, our board of directors approved a special cash dividend of $12.00 per share paid on December 4, 2020, to shareholders of record as of November 25, 2020. This dividend reduced shareholders' equity by approximately $38.0 million.
On October 27, 2020, our board of directors also approved the initiation of a regular quarterly dividend beginning the first of quarter 2021. Subject to approval each quarter by our board of directors and compliance with applicable law, we expect to pay a regular quarterly dividend of $1.00 per share. Going forward, at the end of each year, our board of directors will decide whether to pay an additional special dividend. Although we currently expect to pay the aforementioned dividends, depending on the circumstances and the board of directors’ judgment, we may not pay such dividends as described.
The approximate number of record holders of our common shares at February 25, 2021 was 82, although we believe that the number of beneficial owners of our common shares is substantially greater.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table sets forth information regarding our current common share repurchase program (the “2020 Repurchase Program”) and shares withheld for tax payments due upon vesting of employee restricted stock units and restricted stock awards that vested during the fourth quarter of fiscal year 2020:

Period | Total Number of Shares Purchased for Employee Tax Withholdings(a) |  | Total Number of Shares Purchased as part of Publicly Announced Program(b) |  | Average Price Paid Per Share Purchased Under the Program |  | Purchase Price of Shares Purchased Under the Program |  | Aggregate Purchase Price Yet To Be Purchased Under the Program
October 1, 2020 through October 31, 2020 | 2,954 |  |  | — |  |  | — |  |  | — |  |  | $ | 35,375,676 |
November 1, 2020 through November 30, 2020 | — |  |  | — |  |  | — |  |  | — |  |  | $ | 35,375,676 |
December 1, 2020 through December 31, 2020 | — |  |  | — |  |  | — |  |  | — |  |  | $ | 35,375,676 |
Total | 2,954 |  |  | — |  |  |  |  | — |  |  | $ | 35,375,676 |

(a)We regularly withhold shares for tax payments due upon the vesting of employee Restricted Stock. During the quarter ended December 31, 2020, we purchased 2,954 shares for employee tax withholdings at an average price paid per share of $126.32.
(b)On February 27, 2020, our board of directors approved the 2020 Repurchase Program, authorizing management to repurchase up to $50.0 million of our common shares in the open market and in private transactions in accordance with applicable securities laws. The 2020 Repurchase Program will expire in February 2022, or upon the earlier completion of all authorized purchases under such program.
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ITEM 6. | Selected Financial Data

Not applicable.

ITEM 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations

In this Item 7, we discuss and analyze our consolidated results of operations for the past three fiscal years and other factors that may affect our future financial performance. This discussion should be read in conjunction with our Consolidated Financial Statements, Notes to Consolidated Financial Statements, and Selected Financial Data contained in this Annual Report on Form 10-K.
Business Environment
The performances of the U.S. and international equity markets, as well as the U.S. fixed income market, have a direct impact on our operations and financial position.
Equity Markets
The year 2020 was challenging due to the global spread of COVID-19 and related pandemic. Economic activity ground to a halt as countries hardest hit by the pandemic faced closing businesses, spending declines, and record unemployment levels. Despite unprecedented economic and market disruption, global equities posted positive returns in excess of 16% in 2020 (as measured by the MSCI All Country World Index) and U.S. stocks returned in excess of 18% (as measured by the S&P 500® Index), a remarkable advance given the economic backdrop. Technology stocks were clear winners in 2020 as the work from home era took hold. Online retailers also did well, benefiting from a shift to online shopping in the wake of the pandemic. Energy stocks struggled as oil demand and prices fell on weak economic and transportation activity. In the second half of the year, central bank liquidity, fiscal stimulus, and optimism of rapid-to-market COVID-19 vaccines provided stocks a welcome tailwind.
Fixed Income Markets
Throughout 2020, Federal Reserve and U.S. Treasury intervention played a key role in the fixed income markets. In the first quarter of 2020, the Federal Reserve cut rates in response to signs of a slowing economy exacerbated by an oil production glut as OPEC and Russia failed to come to terms on production cuts. Starting in mid-March, as it became clear the coronavirus pandemic would result in wide scale business shutdowns, central banks globally moved quickly and decidedly to provide liquidity and support while governments directed stimulus support to citizens and businesses facing economic uncertainty. Corporate bond purchasing programs initiated by the U.S. government were barely utilized but served as the impetus for a historic pace of debt issuance in both investment grade and high yield corporate credit markets. The Bloomberg Barclays U.S. Aggregate Bond Index returned 7.5%, second only to 2019 for its best performance since 2002, while the Bloomberg Barclays Investment Grade Corporate Index returned 9.9%, its second-best year since 2009. The ICE BofA U.S. High Yield Index returned 7.1%, rebounding from the worst first quarter’s performance (down 12.7%) since 2008.
Industry Update
Ongoing trends in the investment management industry, including the shift toward private market investments, downward fee pressure, industry consolidation, rising demand for ESG, and expanding conversations around DEI continued in 2020 and do not show any signs of abating.
Investor dollars continue moving toward private markets and less liquid vehicles as investors seek higher returns and lower correlation, contributing to a decline in the number of publicly traded companies. At the same time, investors continue to seek lower cost alternatives to acquire their beta exposure, often utilizing passive exchange-traded funds (“ETFs”), which in turn drives performance of some of the largest publicly traded companies held by broad indexes, making it a difficult environment for active managers to outperform.
The COVID-19 pandemic saw a reduction in travel, which resulted in increased use of technology-based communications. Investors also responded to the pandemic and other social justice events in 2020 by requesting greater clarity on ESG strategies as well as greater transparency on diversity initiatives and commitments.
Consolidation continued, especially in the consulting and wealth management arenas. In fact, over the past five years, we have seen a large number of decision makers leave the market. Some have left the industry all together, some required a liquidity event as a transition of ownership was needed, while others pursued growth and scale via mergers and acquisitions. We
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continue to see moves away from individual decision-making structures in favor of decision-making teams or outsourcing investment decisions to professional buyer groups such as home offices or outsourced chief investment officers, and we expect net new flows to be driven heavily by these groups going forward.
When you consider these trends in combination with the impact of the COVID-19 pandemic and the asset management industry’s own life cycle, you get a glimpse into the “new normal” in which asset managers operate. We believe Diamond Hill is well positioned to navigate these changing tides and adapt to the evolving industry landscape. We continue to believe we can deliver market-beating returns over a full market cycle through active management. Our commitment to managing our portfolios with a strict capacity discipline helps protect our ability to deliver excellent investment outcomes for clients. Our long-standing relationships with professional buyer groups enable us to reach investors who share our long-term perspective. Helping clients achieve their desired investment outcomes is our priority, and we believe our commitment to capacity discipline, alignment of interests with our clients and strong investment results will result in a successful and sustainable future.
Investment Results
It is important to note the past decade has seen a lengthy period of dominance for growth over value stocks, with the performance differential becoming particularly wide over the past three years. In the 10 years ended December 31, 2020, the Russell 3000 Growth Index annualized 16.9% versus 10.4% for the Russell 3000 Value Index. In 2020, the growth index returned 38.3% to the value index’s 2.9% — a performance gap that eclipses any single calendar year since the inception of the Russell 3000 Growth and Value indices in 1995. Because of our valuation-discipline, many clients choose to measure performance against value indices.
The following is a summary of the investment returns for each of our equity strategies as of December 31, 2020, relative to their respective core and value indices, as applicable.
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|  |  | As of December 31, 2020
Equity Composites | Inception |  | 1 Year |  | 3 Year |  | 5 Year |  | 10 Year |  | Since Inception
Diamond Hill Small Cap | 12/31/2000 |  | (0.03) | % |  | 1.3 | % |  | 5.80 | % |  | 7.22 | % |  | 9.83 | %
Russell 2000 Index |  |  | 19.96 | % |  | 10.25 | % |  | 13.26 | % |  | 11.2 | % |  | 8.74 | %
Russell 2000 Value Index |  |  | 4.63 | % |  | 3.72 | % |  | 9.65 | % |  | 8.66 | % |  | 8.54 | %
Diamond Hill Small-Mid Cap | 12/31/2005 |  | 1.55 | % |  | 4.43 | % |  | 7.99 | % |  | 9.88 | % |  | 8.59 | %
Russell 2500 Index |  |  | 19.99 | % |  | 11.33 | % |  | 13.64 | % |  | 11.97 | % |  | 9.55 | %
Russell 2500 Value Index |  |  | 4.88 | % |  | 4.34 | % |  | 9.43 | % |  | 9.33 | % |  | 7.47 | %
Diamond Hill Mid Cap | 12/31/2013 |  | (1.47) | % |  | 3.77 | % |  | 8.00 | % |  | NA |  | 6.98 | %
Russell Midcap Index |  |  | 17.1 | % |  | 11.61 | % |  | 13.40 | % |  | NA |  | 10.96 | %
Russell Midcap Value Index |  |  | 4.96 | % |  | 5.37 | % |  | 9.73 | % |  | NA |  | 8.22 | %
Diamond Hill Large Cap | 6/30/2001 |  | 9.49 | % |  | 9.56 | % |  | 12.70 | % |  | 12.31 | % |  | 9.43 | %
Russell 1000 Index |  |  | 20.96 | % |  | 14.82 | % |  | 15.60 | % |  | 14.01 | % |  | 8.36 | %
Russell 1000 Value Index |  |  | 2.8 | % |  | 6.07 | % |  | 9.74 | % |  | 10.5 | % |  | 7.07 | %
Diamond Hill Large Cap Concentrated | 12/31/2011 |  | 10.03 | % |  | 10.06 | % |  | 13.50 | % |  | NA |  | 13.49 | %
Russell 1000 Index |  |  | 20.96 | % |  | 14.82 | % |  | 15.60 | % |  | NA |  | 15.49 | %
Russell 1000 Value Index |  |  | 2.8 | % |  | 6.07 | % |  | 9.74 | % |  | NA |  | 11.69 | %
Diamond Hill All Cap Select | 6/30/2000 |  | 14.83 | % |  | 9.95 | % |  | 12.06 | % |  | 12.15 | % |  | 10.36 | %
Russell 3000 Index |  |  | 20.89 | % |  | 14.49 | % |  | 15.43 | % |  | 13.79 | % |  | 7.17 | %
Russell 3000 Value Index |  |  | 2.87 | % |  | 5.89 | % |  | 9.74 | % |  | 10.36 | % |  | 7.36 | %
Diamond Hill Long-Short | 6/30/2000 |  | 0.5 | % |  | 5.31 | % |  | 6.81 | % |  | 7.72 | % |  | 7.24 | %
Russell 1000 Index |  |  | 20.96 | % |  | 14.82 | % |  | 15.60 | % |  | 14.01 | % |  | 7.08 | %
60% Russell 1000 Index / 40% BofA ML US T-Bill 0-3 Month Index |  |  | 13.3 | % |  | 9.81 | % |  | 9.92 | % |  | 8.7 | % |  | 5.14 | %
Diamond Hill Global | 12/31/2013 |  | 1.93 | % |  | 4.44 | % |  | 10.68 | % |  | NA |  | 7.35 | %
Morningstar Global Markets Index |  |  | 16.07 | % |  | 9.73 | % |  | 12.11 | % |  | NA |  | 8.80 | %
Diamond Hill International | 12/31/2016 |  | 6.94 | % |  | 6.38 | % |  | NA |  | NA |  | 12.32 | %
Morningstar Global Markets ex US Index |  |  | 11.17 | % |  | 5.07 | % |  | NA |  | NA |  | 10.25 | %

________________________

- | Composite returns are net of fees.
- | Index returns do not reflect any fees.

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The following is a summary of the investment returns for each of our fixed income strategies as of December 31, 2020, relative to their respective passive benchmarks.

|  |  | As of December 31, 2020
Fixed Income Composites | Inception |  | 1 Year |  | 3 Year |  | 5 Year |  | 10 Year |  | Since Inception
Diamond Hill Short Duration Securitized Bond | 7/31/2016 |  | 3.29 | % |  | 3.89 | % |  | NA |  | NA |  | 3.83 | %
Bloomberg Barclays US 1-3 Yr. Gov./Credit Index |  |  | 3.33 | % |  | 2.98 | % |  | NA |  | NA |  | 2.12 | %
Diamond Hill Core Bond | 7/31/2016 |  | 8.13 | % |  | 6.01 | % |  | NA |  | NA |  | 4.43 | %
Bloomberg Barclays US Aggregate Index |  |  | 7.51 | % |  | 5.34 | % |  | NA |  | NA |  | 3.66 | %
Diamond Hill Corporate Credit | 9/30/2002 |  | 9.95 | % |  | 7.92 | % |  | 8.83 | % |  | 6.96 | % |  | 7.38 | %
BofA ML US Corporate & High Yield Index |  |  | 9.34 | % |  | 6.91 | % |  | 7.07 | % |  | 5.83 | % |  | 6.36 | %
Diamond Hill High Yield | 12/31/2014 |  | 13.84 | % |  | 10.08 | % |  | 11.11 | % |  | NA |  | 9.36 | %
BofA ML US High Yield Index |  |  | 6.17 | % |  | 5.89 | % |  | 8.43 | % |  | NA |  | 6.14 | %

________________________

- | Composite returns are net of fees.
- | Index returns do not reflect any fees.

Key Financial Performance Indicators
There are a variety of key performance indicators that we monitor to evaluate our business results. The following table presents the results of certain key performance indicators over the past three fiscal years:

| For the Years Ended December 31,
| 2020 |  | 2019 |  | 2018
Ending AUM (in millions) | $ | 26,411 |  |  | $ | 23,399 |  |  | $ | 19,108 |
Average AUM (in millions) | 21,907 |  |  | 21,653 |  |  | 21,950 |
Net cash inflows (outflows) (in millions) | 1,529 |  |  | (677) |  |  | (1,102) |
Total revenue (in thousands) | 126,388 |  |  | 136,624 |  |  | 145,628 |
Net operating income | 45,538 |  |  | 47,935 |  |  | 71,256 |
Net operating income, as adjusted(a) | 47,757 |  |  | 53,912 |  |  | 69,134 |
Average advisory fee rate | 0.54 | % |  | 0.59 | % |  | 0.62 | %
Operating profit margin | 36 | % |  | 35 | % |  | 49 | %
Operating profit margin, as adjusted(a) | 38 | % |  | 39 | % |  | 47 | %

(a) Net operating income, as adjusted, and operating profit margin, as adjusted, are non-GAAP (as defined below) performance measures. See Use of Supplemental Data as Non-GAAP Performance Measure section within this Annual Report on Form 10-K.
Assets Under Management
Our revenue is derived primarily from investment advisory and administration fees. Investment advisory and administration fees paid to us are generally based on the value of the investment portfolios we manage and fluctuate with changes in the total value of our AUM. We recognize revenue when we satisfy the performance obligations under the terms of a contract with a client.
Our revenues are highly dependent on both the value and composition of AUM. The following is a summary of our AUM by product and investment objective, and a roll-forward of the change in AUM, for the years ended December 31, 2020, 2019, and 2018:
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| Assets Under Management As of December 31,
(in millions) | 2020 |  | 2019 |  | 2018
Proprietary funds | $ | 17,615 |  |  | $ | 16,148 |  |  | $ | 13,440 |
Sub-advised funds | 3,185 |  |  | 2,029 |  |  | 1,358 |
Separately managed accounts | 5,611 |  |  | 5,222 |  |  | 4,310 |
Total AUM | $ | 26,411 |  |  | $ | 23,399 |  |  | $ | 19,108 |

| Assets Under Management by Investment Strategy As of December 31,
(in millions) | 2020 |  | 2019 |  | 2018
Small Cap | $ | 556 |  |  | $ | 795 |  |  | $ | 1,048 |
Small-Mid Cap | 2,810 |  |  | 3,243 |  |  | 2,770 |
Mid Cap | 992 |  |  | 569 |  |  | 143 |
Large Cap | 15,075 |  |  | 12,316 |  |  | 9,611 |
Large Cap Concentrated | 27 |  |  | 28 |  |  | 26 |
All Cap Select | 446 |  |  | 528 |  |  | 432 |
Long-Short | 2,056 |  |  | 3,605 |  |  | 3,767 |
Global/International | 33 |  |  | 35 |  |  | 18 |
Total Equity | 21,995 |  |  | 21,119 |  |  | 17,815 |
Short Duration Securitized Bond | 1,132 |  |  | 809 |  |  | 579 |
Core Fixed Income | 541 |  |  | 300 |  |  | 55 |
Long Duration Treasury | 62 |  |  | 52 |  |  | 52 |
Corporate Credit | 2,020 |  |  | 1,147 |  |  | 757 |
High Yield | 724 |  |  | 135 |  |  | 54 |
Total Fixed Income | 4,479 |  |  | 2,443 |  |  | 1,497 |
Total Equity and Fixed Income | 26,474 |  |  | 23,562 |  |  | 19,312 |
(Less: Investments in affiliated funds) (a) | (63) |  |  | (163) |  |  | (204) |
Total AUM | $ | 26,411 |  |  | $ | 23,399 |  |  | $ | 19,108 |

(a) Certain of the Funds own shares of the Diamond Hill Short Duration Securitized Bond Fund. The Company reduces its total AUM by these investments held in this affiliated fund.

| Change in Assets Under Management For the Year Ended December 31,
(in millions) | 2020 |  | 2019 |  | 2018
AUM at beginning of the year | $ | 23,399 |  |  | $ | 19,108 |  |  | $ | 22,317 |
Net cash inflows (outflows) |  |  |  |  |
proprietary funds | 879 |  |  | (499) |  |  | (978) |
sub-advised funds | 713 |  |  | 216 |  |  | (25) |
separately managed accounts | (63) |  |  | (394) |  |  | (99) |
| 1,529 |  |  | (677) |  |  | (1,102) |
Net market appreciation (depreciation) and income | 1,483 |  |  | 4,968 |  |  | (2,107) |
Increase (decrease) during the year | 3,012 |  |  | 4,291 |  |  | (3,209) |
AUM at end of the year | $ | 26,411 |  |  | $ | 23,399 |  |  | $ | 19,108 |
Average AUM during the year | $ | 21,907 |  |  | $ | 21,653 |  |  | $ | 21,950 |

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| Net Cash Inflows (Outflows) Further Breakdown For the Year Ended December 31,
(in millions) | 2020 |  | 2019 |  | 2018
Net cash inflows (outflows) |  |  |  |  |
Equity | $ | (284) |  |  | $ | (1,515) |  |  | $ | (1,554) |
Fixed Income | 1,813 |  |  | 838 |  |  | 452 |
| $ | 1,529 |  |  | $ | (677) |  |  | $ | (1,102) |

Equity flows were mixed in 2020. Our Large Cap and Mid Cap strategies had combined net inflows of $1.6 billion. However, these net inflows were more than offset by the net outflows in our Long-Short, Small Cap and Small-Mid Cap strategies, which collectively had outflows of $1.8 billion.
Our fixed income strategies continued to see strong growth in 2020 as each of the strategies has met long-term performance objectives compared to peers and benchmarks. Our focused marketing and branding efforts over the past couple years, along with strong performance, led to combined net inflows of $1.8 billion, with each of the strategies attracting at least $200 million in net inflows.
Model Delivery Programs
We provide strategy-specific model portfolios to sponsors of model delivery programs. We do not have discretionary investment authority over individual client accounts in model delivery programs. Therefore, these assets are not included in our AUM. We provide updated model portfolios to the program sponsors on a periodic basis. We are paid for our services by the program sponsor at a pre-determined rate based on assets in the program. Model delivery program assets were $1.1 billion, $0.9 billion, and $0.5 billion as of December 31, 2020, 2019, and 2018, respectively.
Consolidated Results of Operations
The following is a discussion of our consolidated results of operations.

(in thousands, except per share amounts and percentages) | 2020 |  | 2019 |  | % Change |  | 2019 |  | 2018 |  | % Change
Total revenue | $ | 126,388 |  |  | $ | 136,624 |  |  | (7)% |  | $ | 136,624 |  |  | $ | 145,628 |  |  | (6)%
Net operating income | 45,538 |  |  | 47,935 |  |  | (5)% |  | 47,935 |  |  | 71,256 |  |  | (33)%
Net operating income, as adjusted (a) | 47,757 |  |  | 53,912 |  |  | (11)% |  | 53,912 |  |  | 69,134 |  |  | (22)%
Net income attributable to common shareholders | 38,661 |  |  | 54,959 |  |  | (30)% |  | 54,959 |  |  | 47,376 |  |  | 16%
Earnings per share attributable to common shareholders (diluted) | $ | 12.03 |  |  | $ | 15.99 |  |  | (25)% |  | $ | 15.99 |  |  | $ | 13.48 |  |  | 19%
Operating profit margin | 36 | % |  | 35 | % |  | NM |  | 35 | % |  | 49 | % |  | NM
Operating profit margin, as adjusted (a) | 38 | % |  | 39 | % |  | NM |  | 39 | % |  | 47 | % |  | NM

(a) Net operating income, as adjusted, and operating profit margin, as adjusted, are non-GAAP (as defined below) performance measures. See Use of Supplemental Data as Non-GAAP Performance Measure section within this Annual Report on Form 10-K.
Summary Discussion of Consolidated Results of Operations - Year Ended December 31, 2020, compared with
Year Ended December 31, 2019
Revenue for the year ended December 31, 2020, decreased $10.2 million compared to the year ended December 31, 2019, primarily due to a decrease in the average advisory fee rate from 0.59% to 0.54% year-over-year, which was partially offset by a 1% increase in average AUM. The decrease in average advisory fee rate was driven by an increase in the mix of assets held in lower fee rate strategies.
Operating profit margin was 36% for the year ended December 31, 2020, and 35% for the year ended December 31, 2019. Operating profit margin, as adjusted, was 38% for the year ended December 31, 2020, and 39% for the year ended December 31, 2019. Operating profit margin, as adjusted, excludes deferred compensation expense (benefit) from operating income because it is offset by an equal amount in investment income below net operating income on the income statement and thus has no effect on net income attributable to the Company. We believe this non-GAAP measure helps the reader to understand our core operating results and increases comparability period-to-period. See the "Use of Supplemental Data as Non-GAAP Performance Measures" section below in Part II. Item 7 of this Annual Report on Form 10-K.
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We expect that our operating margin will fluctuate from period to period based on various factors, including revenues, investment results, employee performance, staffing levels, gains and losses on investments held in deferred compensation plans,
the ongoing impact of COVID-19, and development of investment strategies, products, and channels. We compensate portfolio managers based on long-term performance, so when revenue and long-term performance are misaligned, operating margins can fluctuate materially.
We recognized $6.6 million in investment income for the year ended December 31, 2020, compared with investment income of $30.5 million for the year ended December 31, 2019. The decrease in market appreciation year over year was due to a lower average investment balance throughout the year and lower returns on the investments.
Income tax expense decreased $4.7 million for the year ended December 31, 2020, compared to the year ended December 31, 2019. The decrease in income tax expense was primarily due to a decrease in DHCM's income before taxes, which was partially offset by an increase in our effective tax rate from 23.8% to 26.8% year-over-year. The increase in our effective tax rate in 2020 was primarily due to excess tax deficits on the vesting of restricted stock awards of $0.6 million in 2020 and the $1.0 million benefit attributable to redeemable noncontrolling interests in 2019.
We generated net income attributable to common shareholders of $38.7 million ($12.03 per diluted share) for the year ended December 31, 2020, compared with net income attributable to common shareholders of $55.0 million ($15.99 per diluted share) for the year ended December 31, 2019, primarily due to decreased revenues and a decrease in investment income.
See the “Use of Supplemental Data as Non-GAAP Performance Measures” section below in Part II, Item 7, of this Annual Report on Form 10-K.
Summary Discussion of Consolidated Results of Operations - Year Ended December 31, 2019, compared with Year Ended December 31, 2018
Revenue for the year ended December 31, 2019, decreased $9.0 million compared to the year ended December 31, 2018, primarily due to a decrease in the average advisory fee rate from 0.62% to 0.59% year-over-year and a 1% decrease in average AUM. The decrease in average advisory fee rate was driven by an increase in the mix of assets held in lower fee rate strategies.
Operating profit margin was 35% for the year ended December 31, 2019, down from 49% for the year ended December 31, 2018. Operating profit margin, as adjusted, was 39% for the year ended December 31, 2019, down from 47% for the year ended December 31, 2018. Operating profit margin, as adjusted, excludes deferred compensation expense (benefit) from operating income because it is offset by an equal amount in investment income below net operating income on the income statement and thus has no effect on net income attributable to the Company. We believe this non-GAAP measure helps the reader to understand our core operating results and increases comparability period to period. See the "Use of Supplemental Data as Non-GAAP Performance Measures" section below in Part II. Item 7, of this Annual Report on Form 10-K.
We expect that our operating margin will fluctuate from period to period based on various factors, including revenues, investment results, employee performance, staffing levels, gains and losses on investments held in deferred compensation plans, and development of investment strategies, products, or channels. We compensate portfolio managers based on long-term performance, so when revenue and long-term performance are misaligned, operating margins can fluctuate materially.
We recognized $30.5 million in investment income for the year ended December 31, 2019, due primarily to market appreciation from our investments, compared with investment losses of $6.3 million for the year ended December 31, 2018, largely due to market depreciation on our investments.
Income tax expense was consistent from the year ended December 31, 2019, compared to the year ended December 31, 2018. The impact of the increase of pre-tax income was fully offset by the reduction in the effective rate from 28.7% to 23.8% year-over-year. The decrease in the effective tax rate was primarily due to uncertain state tax positions of approximately $3.0 million recorded in 2018.
We generated net income attributable to common shareholders of $55.0 million ($15.99 per diluted share) for the year ended December 31, 2019, compared with net income attributable to common shareholders of $47.4 million ($13.48 per diluted share) for the year ended December 31, 2018. The increase was due to an increase in investment income, which was partially offset by the decrease in net operating income.
See the "Use of Supplemental Data as Non-GAAP Performance Measures" section below in Part II. Item 7, of this Annual Report on Form 10-K.
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Revenue

(in thousands, except percentages) | 2020 |  | 2019 |  | % Change |  | 2019 |  | 2018 |  | % Change
Investment advisory | $ | 119,125 |  |  | $ | 128,009 |  |  | (7)% |  | $ | 128,009 |  |  | $ | 135,318 |  |  | (5)%
Mutual fund administration, net | 7,263 |  |  | 8,615 |  |  | (16)% |  | 8,615 |  |  | 10,310 |  |  | (16)%
Total | 126,388 |  |  | 136,624 |  |  | (7)% |  | 136,624 |  |  | 145,628 |  |  | (6)%

Revenue for the Year Ended December 31, 2020 compared with Year Ended December 31, 2019
Investment Advisory Fees. Investment advisory fees decreased by $8.9 million, or 7%, from the year ended December 31, 2019, to the year ended December 31, 2020. Investment advisory fees are calculated as a percentage of the market value of client accounts at contractual fee rates, which vary by investment product. The decrease in investment advisory fees was driven by a reduction in the average advisory fee rate from 0.59% in 2019 to 0.54% in 2020, which was partially offset by an increase of 1% in average AUM year over year. The decrease in average advisory fee rate was driven by an increase in the mix of assets held in lower fee rate strategies during the year ended December 31, 2020, compared to the year ended December 31, 2019. For the year ended December 31, 2020, the average advisory fee rates for equity and fixed income strategies were 0.57% and 0.40%, respectively. For the year ended December 31, 2019, the average advisory fee rates for equity and fixed income strategies were 0.61% and 0.41%, respectively.
Mutual Fund Administration Fees. Mutual fund administration fees decreased $1.4 million, or 16%, from the year ended December 31, 2019, to the year ended December 31, 2020. Mutual fund administration fees include administration fees received from the Funds, which are calculated as a percentage of the Funds' average AUM. The decrease was primarily due to an increase in sub-transfer agent and servicing fees paid by us on behalf of the Funds. In addition, there was a 1% decrease in the Funds' average AUM from the year ended December 31, 2019, to the year ended December 31, 2020.
Revenue for the Year Ended December 31, 2019 compared with Year Ended December 31, 2018
Investment Advisory Fees. Investment advisory fees decreased by $7.3 million, or 5%, from the year ended December 31, 2018, to the year ended December 31, 2019. Investment advisory fees are calculated as a percentage of the market value of client accounts at contractual fee rates, which vary by investment product. The decrease in investment advisory fees was driven by a reduction in the average advisory fee rate from 0.62% in 2018 to 0.59% in 2019 and a decrease of 1% in average AUM year over year. The decrease in average advisory fee rate was driven by an increase in the mix of assets held in lower fee rate strategies during the year ended December 31, 2019, compared to the year ended December 31, 2018. For the year ended December 31, 2019, the average advisory fee rates for equity and fixed income strategies were 0.61% and 0.41%, respectively. For the year ended December 31, 2018, the average advisory fee rates for equity and fixed income strategies were 0.63% and 0.48%, respectively.
Mutual Fund Administration Fees. Mutual fund administration fees decreased $1.7 million, or 16%, from the year ended December 31, 2018 to the year ended December 31, 2019. Mutual fund administration fees are calculated as a percentage of average Funds’ AUM. The decrease was due to reductions in the administration fee rates received from the Funds, a 4% decrease in average Funds’ AUM in 2019 and an increase in administrative expenses paid on behalf of the Funds. The table below summarizes the decreases in the administration fee rates during the periods indicated:

| Class A & C |  | Class I |  | Class Y
1/1/18 - 2/27/2018 | 0.23% |  | 0.18% |  | 0.08%
2/28/2018 - 12/31/2019 | 0.21% |  | 0.17% |  | 0.05%

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Expenses

(in thousands, except percentages) | 2020 |  | 2019 |  | % Change |  | 2019 |  | 2018 |  | % Change
Compensation and related costs, excluding deferred compensation expense | $ | 58,292 |  |  | $ | 60,264 |  |  | (3)% |  | $ | 60,264 |  |  | $ | 55,975 |  |  | 8%
Deferred compensation expense (benefit) | 2,219 |  |  | 5,977 |  |  | NM |  | 5,977 |  |  | (2,121) |  |  | NM
General and administrative | 11,003 |  |  | 13,278 |  |  | (17)% |  | 13,278 |  |  | 11,649 |  |  | 14%
Sales and marketing | 6,000 |  |  | 5,867 |  |  | 2% |  | 5,867 |  |  | 5,243 |  |  | 12%
Mutual fund administration | 3,336 |  |  | 3,303 |  |  | 1% |  | 3,303 |  |  | 3,626 |  |  | (9)%
Total | 80,850 |  |  | 88,689 |  |  | (9)% |  | 88,689 |  |  | 74,372 |  |  | 19%

Expenses for the Year Ended December 31, 2020 compared with Year Ended December 31, 2019
Compensation and Related Costs, Excluding Deferred Compensation Expense. Employee compensation and benefits decreased by $2.0 million from the year ended December 31, 2019, to the year ended December 31, 2020. This decrease is primarily due to decreases in severance expense of $1.6 million and in restricted stock expense of $1.0 million. These decreases were partially offset by increases in salary and related benefits of $0.2 million and in incentive compensation of $0.4 million. On average, we had 126 full-time equivalent employees for 2020, compared to 128 for 2019. Incentive compensation expense can fluctuate significantly period over period as we evaluate investment performance, individual performance, Company performance and other factors.
Deferred Compensation Expense (Benefit). Deferred compensation expense was $2.2 million for the year ended December 31, 2020, compared to deferred compensation expense of $6.0 million for the year ended December 31, 2019, mostly due to a decrease in market appreciation on our deferred compensation investments period over period. The gain on deferred compensation plan investments increases deferred compensation expense and is included in operating income. Deferred compensation expense is offset by an equal amount in investment income below net operating income on the consolidated statements of income statement, and thus has no impact on net income attributable to us.
General and Administrative. General and administrative expenses decreased by $2.3 million, or 17%, from the year ended December 31, 2019, to the year ended December 31, 2020. This decrease was primarily due a non-recurring $1.1 million refund received in 2020 related to our Ohio commercial activity tax, which is a gross receipts tax, and therefore, is not included in income taxes, as well as decreases in corporate recruiting fees of $0.8 million, and in travel and related expenses period over period.
Sales and Marketing. Sales and marketing expenses increased by $0.1 million, or 2%, from the year ended December 31, 2019, to the year ended December 31, 2020. The increase was primarily due to an increase in spending related to our customer relationship management system and related external data costs of $0.9 million. This increase was largely offset by a reduction in sales and marketing travel and related expense of $0.8 million.
Mutual Fund Administration. Mutual fund administration expenses increased by 1% from the year ended December 31, 2019, to the year ended December 31, 2020. Mutual fund administration expense consists of both variable and fixed expenses. The variable expenses are based on Fund AUM levels and the number of shareholder accounts.
Expenses for the Year Ended December 31, 2019 compared with Year Ended December 31, 2018
Compensation and Related Costs, Excluding Deferred Compensation Expense. Employee compensation and benefits increased by $4.3 million from the year ended December 31, 2018, to the year ended December 31, 2019. This increase is due to increases in salary and related benefits of $3.0 million and incentive compensation of $1.3 million. On average, we had 128 full-time equivalent employees for 2019, compared to 120 for 2018. Incentive compensation expense can fluctuate significantly period over period as we evaluate investment performance, individual performance, Company performance and other factors.
Deferred Compensation Expense (Benefit). Deferred compensation expense was $6.0 million for the year ended December 31, 2019, primarily due to market appreciation on our deferred compensation investments compared to deferred compensation (benefit) of $(2.1) million for the year ended December 31, 2018, from market depreciation on our deferred compensation investments. The gain (loss) on deferred compensation plan investments increases (decreases) deferred compensation expense (benefit) and is included in operating income. Deferred compensation expense is offset by an equal amount in investment
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income below net operating income on the consolidated statements of income statement, and thus, has no impact on net income attributable to us.
General and Administrative. General and administrative expenses increased by $1.6 million, or 14%, from the year ended December 31, 2018, to the year ended December 31, 2019. This increase is primarily due to increases in corporate recruiting fees of $1.0 million, market research and data expense of $0.3 million, and software expense of $0.3 million.
Sales and Marketing. Sales and marketing expenses increased by $0.6 million, or 12%, from the year ended December 31, 2018, to the year ended December 31, 2019. The increase was due to our branding and public relations initiatives and additional sales data costs. For each of the years ended December 31, 2019, and 2018, approximately 56% and 65%, respectively, of sales and marketing expense is related to revenue sharing payments made to third-party financial intermediaries.
Mutual Fund Administration. Mutual fund administration expenses decreased by $0.3 million, or 9%, from the year ended December 31, 2018, to the year ended December 31, 2019. Mutual fund administration expenses consist of both variable and fixed expenses. The variable expenses are based on Fund AUM and the number of shareholder accounts. The decrease was primarily due to a reduction in outsourced administrative services for the Funds, which were brought in-house during 2018, as well as a 4% decrease in average Funds’ AUM from the year ended December 31, 2018, to the year ended December 31, 2019.
Liquidity and Capital Resources
Sources of Liquidity
Our current financial condition is highly liquid, with a significant amount of our assets comprised of cash and cash equivalents, investments, accounts receivable, and other current assets. Our main source of liquidity is cash flows from operating activities, which are generated from investment advisory and mutual fund administration fees. Cash and cash equivalents, investments held directly by DHCM, accounts receivable, and other current assets represented $205.1 million and $211.1 million of total assets as of December 31, 2020, and 2019, respectively. We believe these sources of liquidity as well as our continuing cash flows from operating activities will be sufficient to meet our current and future operating needs for the next 12 months.
Throughout 2020, the COVID-19 pandemic created uncertainty and volatility in the financial markets, and could continue to do so in 2021, which may impact our ability to access capital and liquidity and the terms under which we can do so. We will continue to assess our liquidity needs as the impact of the COVID-19 pandemic on the economy, the financial markets, and our operations continues to evolve.
Uses of Liquidity
In line with our primary objective to fulfill our fiduciary duty to clients and secondary objective to achieve an adequate long-term return for shareholders, we anticipate our main uses of cash will be for operating expenses and seed capital to fund new and existing investment strategies.
Our board of directors and management regularly review various factors to determine whether we have capital in excess of that required for the business and the appropriate use of any excess capital. The factors considered include our investment opportunities, capital needed for investment strategies, and share repurchase opportunities.
In September 2018, our board of directors approved the 2018 Repurchase Program authorizing the purchase of up to $50.0 million of our common shares. Under the 2018 Repurchase Program, we repurchased 28,361 of our common shares during the first two months of 2020 for a total of $4.0 million, which exhausted the $50.0 million authorized.
On February 27, 2020, the board of directors approved the 2020 Repurchase Program authorizing management to repurchase up to and additional $50 million of our common shares. Under the 2020 Repurchase Program, we repurchased 129,389 of our common shares during the year ended December 31, 2020, for a total of $14.6 million. As of December 31, 2020, $35.4 million remains available for repurchases under the 2020 Repurchase Program. The authority to repurchase shares may be exercised from time to time as market conditions warrant, is subject to regulatory constraints, and will expire two years from the date of board approval, or upon the earlier repurchase in full of the authorized amount of shares. The timing, amount, and other terms and conditions of any repurchases will be determined by management in its discretion based on a variety of factors, including the market price of such shares, corporate considerations, general market and economic conditions, legal requirements, and the expected and continued impact of COVID-19.
The following table summarizes the quarterly repurchase transactions made under the 2020 Repurchase Program since its inception:
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Period | Total Number of Shares Purchased |  | Average Price Paid Per Share Purchased |  | Purchase Price of Shares Purchased
Quarter Ended March 31, 2020 | 48,576 |  |  | $ | 106.22 |  |  | $ | 5,159,919 |
Quarter Ended June 30, 2020 | 27,078 |  |  | 103.48 |  |  | 2,801,897 |
Quarter Ended September 30, 2020 | 53,735 |  |  | $ | 123.99 |  |  | 6,662,508 |
Quarter Ended December 31, 2020 | — |  |  | — |  |  | — |
Total | 129,389 |  |  | $ | 113.03 |  |  | $ | 14,624,324 |

Fiscal 2020 was the 13th consecutive year that we paid a special dividend. We paid out special dividends of $12.00, $9.00, and $8.00 during the years ended December 31, 2020, 2019, and 2018, respectively. The 2020, 2019, and 2018 special dividends reduced shareholders’ equity by $38.0 million, $30.3 million, and $28.1 million, respectively.
On October 27, 2020, our board of directors approved a special cash dividend of $12.00 per share paid on December 4, 2020, to shareholders of record as of November 25, 2020. This dividend reduced shareholders' equity by approximately $38.0 million.
On October 27, 2020, our board of directors also approved the initiation of a regular quarterly dividend beginning the first of quarter 2021. Subject to approval each quarter by our board of directors and compliance with applicable law, we expect to pay a regular quarterly dividend of $1.00 per share. Going forward, at the end of each year, our board of directors will decide whether to pay an additional special dividend. Although we currently expect to pay the aforementioned dividends, depending on the circumstances and the board of directors’ judgment, we may not pay such dividends as described.
Working Capital
As of December 31, 2020, we had working capital of approximately $168.9 million, compared to $176.7 million as of December 31, 2019. Working capital includes cash, accounts receivable, investments, direct investments in the Diamond Hill International Fund and the Diamond Hill Global Fund (together the "Consolidated Funds”), and other current assets of DHCM, net of accounts payable and accrued expenses, accrued incentive compensation, deferred compensation and other current liabilities of DHCM.
We had no debt and we believe our available working capital is sufficient to cover current expenses and presently anticipated capital expenditures.
Below is a summary of investments as of December 31, 2020 and 2019:

| As of December 31, |  |  |
| 2020 |  | 2019 |  |  |
Corporate Investments: |  |  |  |  |  |
Diamond Hill Core Bond Fund | $ | 47,204,636 |  |  | $ | 43,691,925 |  |  |  |
Diamond Hill Research Opportunities Fund(a) | — |  |  | 16,223,519 |  |  |  |
Diamond Hill Long-Short Fund(a) | 16,945,863 |  |  | — |  |  |  |
Diamond Hill High Yield Fund | — |  |  | 14,984,548 |  |  |  |
Diamond Hill Global Fund | 11,269,719 |  |  | 11,073,515 |  |  |  |
Diamond Hill International Fund | 10,156,320 |  |  | 8,039,570 |  |  |  |
Total Corporate Investments | 85,576,538 |  |  | 94,013,077 |  |  |  |
Deferred Compensation Plan Investments in the Funds | 33,241,952 |  |  | 30,342,204 |  |  |  |
Total investments held by DHCM | 118,818,490 |  |  | 124,355,281 |  |  |  |
Redeemable noncontrolling interest in Consolidated Funds | 9,582,646 |  |  | 15,081,897 |  |  |  |
Total investments | $ | 128,401,136 |  |  | $ | 139,437,178 |  |  |  |

(a) In October 2020, the Diamond Hill Research Opportunities Fund merged into the Diamond Hill Long-Short Fund.
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Cash Flow Analysis
Cash Flows from Operating Activities
Our cash flows from operating activities are calculated by adjusting net income to reflect other significant operating sources and uses of cash, certain significant non-cash items, such as share-based compensation, and timing differences in the cash settlement of operating assets and liabilities. We expect that cash flows provided by operating activities will continue to serve as our primary source of working capital in the near future.
For the year ended December 31, 2020, net cash provided by operating activities totaled $59.8 million. Cash provided by operating activities was primarily driven by net income of $38.2 million, the add back of share-based compensation of $7.7 million, depreciation of $1.0 million, net redemptions of securities held in the underlying investment portfolios of the Consolidated Funds of $3.2 million, and the cash impact of timing differences in the settlement of assets and liabilities of $12.7 million. These cash inflows were partially offset by net gains on investments of $3.0 million. Absent the operating cash flows of the Consolidated Funds, cash flows from operations would have been approximately $57.3 million.
For the year ended December 31, 2019, net cash provided by operating activities totaled $57.0 million. Cash provided by operating activities was primarily driven by net income of $59.8 million, the add back of share-based compensation of $9.1 million, depreciation of $1.2 million, net redemptions of securities held in the underlying investment portfolios of the Consolidated Funds of $6.3 million, and the cash impact of timing differences in the settlement of assets and liabilities of $1.7 million. These cash inflows were partially offset by net gains on investments of $21.1 million. Absent the operating cash flows of the Consolidated Funds, cash flow from operations would have been approximately $53.5 million.
For the year ended December 31, 2018, net cash provided by operating activities totaled $28.1 million. The changes in net cash provided by operating activities were primarily driven by net income of $46.3 million, the add back of share-based compensation of $8.9 million and depreciation of $1.2 million, net losses on investments of $14.3 million, and the cash impact of timing differences in the settlement of assets and liabilities of $9.6 million. These cash inflows were partially offset by the net purchases of trading securities held in the underlying investment portfolio of the Consolidated Funds of $52.2 million. Absent the operating cash flows of the Consolidated Funds, cash flow from operations would have been approximately $79.9 million.
Cash Flows from Investing Activities
Our cash flows from investing activities consist primarily of capital expenditures and purchases and redemptions in our investment portfolio.
Cash flows provided by investing activities totaled $8.4 million for the year ended December 31, 2020. The cash provided was primarily due to proceeds from the redemption of investments totaling $25.7 million. These proceeds were partially offset by corporate investment purchases of $14.9 million and property and equipment purchases (primarily capitalized software) of $2.5 million.
Cash flows provided by investing activities totaled $10.9 million for the year ended December 31, 2019. The cash provided was primarily due to proceeds from the redemption of investments totaling $48.6 million. These proceeds were partially offset by corporate investment purchases of $14.4 million and property and equipment purchases of $0.7 million. The remaining change in reported cash flows from investing activities was attributable to $22.7 million in net cash that was removed from our balance sheet due to the de-consolidation of our investment in an exchange traded fund during the period.
Cash flows used in investing activities totaled $4.3 million for the year ended December 31, 2018. The cash used was primarily due to corporate investment purchases of $6.3 million and property and equipment purchases of $0.8 million. These cash outflows were partially offset by proceeds from the redemptions of investments of $2.9 million.
Cash Flows from Financing Activities
Our cash flows from financing activities consist primarily of the payment of special dividends, the repurchase of our common shares, shares withheld related to employee tax withholding and distributions to, or contributions from, redeemable non-controlling interest holders.
For the year ended December 31, 2020, net cash used in financing activities totaled $62.9 million, consisting of the payment of special dividends of $38.0 million, the repurchase of our common shares of $18.6 million, $1.9 million of shares withheld related to employee tax withholding, and net redemptions from redeemable non-controlling interest holders of $4.3 million.
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For the year ended December 31, 2019, net cash used in financing activities totaled $59.1 million, consisting of the payment of special dividends of $30.3 million, the repurchase of our common shares of $38.7 million, and $1.4 million of shares withheld related to employee tax withholding. These financing outflows were partially offset by net subscriptions received from redeemable non-controlling interest holders of $11.3 million.
For the year ended December 31, 2018, net cash used in financing activities totaled $16.0 million, consisting of the payment of special dividends of $28.1 million, the repurchase of our common shares of $7.2 million, and $1.9 million of shares withheld related to employee tax withholding. These financing outflows were partially offset by net subscriptions received from redeemable non-controlling interest holders of $21.2 million.
Supplemental Consolidated Cash Flow Statement
The following table summarizes the condensed cash flows for the years ended December 31, 2020, 2019, and 2018 that are attributable to Diamond Hill and to the Consolidated Funds, and the related eliminations required in preparing the consolidated financial statements.

| Year Ended December 31, 2020
| Cash flow attributable to Diamond Hill Investment Group, Inc. |  | Cash flow attributable to Consolidated Funds |  | Eliminations |  | As reported on the Consolidated Statement of Cash Flows
Cash flows from operating activities: |  |  |  |  |  |  |
Net income | $ | 38,660,545 |  |  | $ | 403,985 |  |  | $ | (899,392) |  |  | $ | 38,165,138 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |  |  |  |  |
Depreciation | 992,836 |  |  | — |  |  | — |  |  | 992,836 |
Share-based compensation | 7,739,320 |  |  | — |  |  | — |  |  | 7,739,320 |
Net (gains)/losses on investments | (3,500,848) |  |  | (403,985) |  |  | 899,392 |  |  | (3,005,441) |
Net change in securities held by Consolidated Funds | — |  |  | 3,179,362 |  |  | — |  |  | 3,179,362 |
Other changes in assets and liabilities | 13,394,030 |  |  | (692,760) |  |  | — |  |  | 12,701,270 |
Net cash provided by operating activities | 57,285,883 |  |  | 2,486,602 |  |  | — |  |  | 59,772,485 |
Net cash provided by investing activities | 6,587,218 |  |  | — |  |  | 1,824,482 |  |  | 8,411,700 |
Net cash used in financing activities | (58,571,152) |  |  | (2,486,602) |  |  | (1,824,482) |  |  | (62,882,236) |
Net change during the period | 5,301,949 |  |  | — |  |  | — |  |  | 5,301,949 |
Cash and cash equivalents at beginning of year | 93,176,253 |  |  | — |  |  | — |  |  | 93,176,253 |
Cash and cash equivalents at end of year | $ | 98,478,202 |  |  | $ | — |  |  | $ | — |  |  | $ | 98,478,202 |

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| Year Ended December 31, 2019
| Cash flow attributable to Diamond Hill Investment Group, Inc. |  | Cash flow attributable to Consolidated Funds |  | Eliminations |  | As reported on the Consolidated Statement of Cash Flows
Cash flows from Operating Activities: |  |  |  |  |  |  |
Net Income | $ | 54,959,024 |  |  | $ | 12,108,850 |  |  | $ | (7,313,555) |  |  | $ | 59,754,319 |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |  |  |  |  |  |
Depreciation | 1,164,207 |  |  | — |  |  | — |  |  | 1,164,207 |
Share-based compensation | 9,081,421 |  |  | — |  |  | — |  |  | 9,081,421 |
Net (gains)/losses on investments | (16,263,168) |  |  | (12,108,850) |  |  | 7,313,555 |  |  | (21,058,463) |
Net change in securities held by Consolidated Funds | — |  |  | 6,286,645 |  |  | — |  |  | 6,286,645 |
Other changes in assets and liabilities | 4,518,254 |  |  | (2,780,140) |  |  | — |  |  | 1,738,114 |
Net cash provided by operating activities | 53,459,738 |  |  | 3,506,505 |  |  | — |  |  | 56,966,243 |
Net cash provided by (used in) investing activities | 25,702,461 |  |  | (22,723,853) |  |  | 7,876,466 |  |  | 10,855,074 |
Net cash provided by (used in) financing activities | (70,416,005) |  |  | 19,217,348 |  |  | (7,876,466) |  |  | (59,075,123) |
Net change during the period | 8,746,194 |  |  | — |  |  | — |  |  | 8,746,194 |
Cash and cash equivalents at beginning of year | 84,430,059 |  |  | — |  |  | — |  |  | 84,430,059 |
Cash and cash equivalents at end of year | $ | 93,176,253 |  |  | $ | — |  |  | $ | — |  |  | $ | 93,176,253 |

| Year Ended December 31, 2018
| Cash flow attributable to Diamond Hill Investment Group, Inc. |  | Cash flow attributable to Consolidated Funds |  | Eliminations |  | As reported on the Consolidated Statement of Cash Flows
Cash flows from Operating Activities: |  |  |  |  |  |  |
Net Income | $ | 47,375,829 |  |  | $ | (2,677,977) |  |  | $ | 1,616,536 |  |  | $ | 46,314,388 |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |  |  |  |  |  |
Depreciation | 1,159,380 |  |  | — |  |  | — |  |  | 1,159,380 |
Share-based compensation | 8,896,610 |  |  | — |  |  | — |  |  | 8,896,610 |
Net (gains)/losses on investments | 13,235,941 |  |  | 2,677,977 |  |  | (1,616,536) |  |  | 14,297,382 |
Net change in securities held by Consolidated Funds | — |  |  | (52,168,968) |  |  | — |  |  | (52,168,968) |
Other changes in assets and liabilities | 9,202,427 |  |  | 429,372 |  |  | — |  |  | 9,631,799 |
Net cash provided by (used in) operating activities | 79,870,187 |  |  | (51,739,596) |  |  | — |  |  | 28,130,591 |
Net cash provided by (used in) investing activities | (34,792,725) |  |  | — |  |  | 30,531,828 |  |  | (4,260,897) |
Net cash provided by (used in) financing activities | (37,249,511) |  |  | 51,739,596 |  |  | (30,531,828) |  |  | (16,041,743) |
Net change during the period | 7,827,951 |  |  | — |  |  | — |  |  | 7,827,951 |
Cash and cash equivalents at beginning of year | 76,602,108 |  |  | — |  |  | — |  |  | 76,602,108 |
Cash and cash equivalents at end of year | $ | 84,430,059 |  |  | $ | — |  |  | $ | — |  |  | $ | 84,430,059 |

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Selected Quarterly Information
Our unaudited quarterly results of operations for the years ended December 31, 2020 and 2019 are summarized below:

| At or For the Quarter Ended
| 2020 |  | 2019
(in thousands, except per share and AUM data) | 12/31 |  | 09/30 |  | 06/30 |  | 03/31 |  | 12/31 |  | 09/30 |  | 06/30 |  | 03/31
Assets under management (in millions) | $ | 26,411 |  |  | $ | 22,283 |  |  | $ | 20,645 |  |  | $ | 17,496 |  |  | $ | 23,399 |  |  | $ | 22,203 |  |  | $ | 21,612 |  |  | $ | 20,880 |
Total revenue | 35,037 |  |  | 31,176 |  |  | 28,249 |  |  | 31,926 |  |  | 35,908 |  |  | 34,592 |  |  | 33,545 |  |  | 32,579 |
Compensation and related costs, excluding deferred compensation expense | 16,613 |  |  | 13,704 |  |  | 12,558 |  |  | 15,417 |  |  | 16,651 |  |  | 15,715 |  |  | 14,342 |  |  | 13,557 |
Deferred compensation expense (benefit) | 4,588 |  |  | 1,961 |  |  | 3,826 |  |  | (8,156) |  |  | 1,925 |  |  | 357 |  |  | 1,283 |  |  | 2,412 |
Other expenses | 5,761 |  |  | 5,541 |  |  | 4,838 |  |  | 4,199 |  |  | 5,368 |  |  | 5,763 |  |  | 5,840 |  |  | 5,476 |
Total operating expenses | 26,962 |  |  | 21,206 |  |  | 21,222 |  |  | 11,460 |  |  | 23,944 |  |  | 21,835 |  |  | 21,465 |  |  | 21,445 |
Net operating income | 8,075 |  |  | 9,970 |  |  | 7,027 |  |  | 20,466 |  |  | 11,964 |  |  | 12,757 |  |  | 12,080 |  |  | 11,134 |
Investment income (loss), net | 12,367 |  |  | 5,053 |  |  | 11,563 |  |  | (22,398) |  |  | 6,880 |  |  | 2,822 |  |  | 6,520 |  |  | 14,285 |
Income (loss) before taxes | 20,442 |  |  | 15,023 |  |  | 18,590 |  |  | (1,932) |  |  | 18,844 |  |  | 15,579 |  |  | 18,600 |  |  | 25,419 |
Income tax expense | (4,529) |  |  | (3,882) |  |  | (4,952) |  |  | (595) |  |  | (4,321) |  |  | (4,062) |  |  | (4,442) |  |  | (5,863) |
Net income (loss) | 15,913 |  |  | 11,141 |  |  | 13,638 |  |  | (2,527) |  |  | 14,523 |  |  | 11,517 |  |  | 14,158 |  |  | 19,556 |
Net income attributable to common shareholders | 14,364 |  |  | 10,566 |  |  | 12,201 |  |  | 1,530 |  |  | 13,414 |  |  | 11,417 |  |  | 13,195 |  |  | 16,933 |
Diluted EPS | $ | 4.54 |  |  | $ | 3.30 |  |  | $ | 3.79 |  |  | $ | 0.47 |  |  | $ | 3.99 |  |  | $ | 3.35 |  |  | $ | 3.79 |  |  | $ | 4.84 |
Diluted weighted shares outstanding | 3,164 |  |  | 3,201 |  |  | 3,221 |  |  | 3,273 |  |  | 3,364 |  |  | 3,412 |  |  | 3,478 |  |  | 3,497 |

Contractual Obligations
The following table presents a summary of our future obligations under the terms of lease commitments, contractual purchase obligations, and deferred compensation obligations as of December 31, 2020. Other purchase obligations include contractual amounts that will be due for the purchase of services to be used in our operations, such as mutual fund sub-administration, sales data costs, and investment related research software. These obligations may be cancellable at earlier times than those indicated and, under certain circumstances, may involve termination fees. Because these obligations are primarily of a normal recurring nature, we expect to fund them from future cash flows from operations. Deferred compensation obligations include compensation that will be paid out in future years and which will be funded by the related deferred compensation investments currently held on our consolidated balance sheets (see Note 7 to the consolidated financial statements). The information presented does not include operating expenses or capital expenditures that will be committed in the normal course of operations in 2021 and future years:

|  |  | Payments Due by Period
| Total |  | 2021 |  | 2022 |  | 2023 |  | 2024 |  | 2025 |  | Thereafter
Operating lease obligations | $ | 2,652 |  |  | $ | 624 |  |  | $ | 624 |  |  | $ | 624 |  |  | $ | 624 |  |  | $ | 156 |  |  | $ | — |
Purchase obligations | 9,345 |  |  | 4,273 |  |  | 2,521 |  |  | 1,344 |  |  | 595 |  |  | 612 |  |  | — |
Deferred compensation obligations | 33,242 |  |  | 3,079 |  |  | 2,787 |  |  | 3,238 |  |  | 3,470 |  |  | 4,108 |  |  | 16,560 |
Total | $ | 45,239 |  |  | $ | 7,976 |  |  | $ | 5,932 |  |  | $ | 5,206 |  |  | $ | 4,689 |  |  | $ | 4,876 |  |  | $ | 16,560 |

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Use of Supplemental Data as Non-GAAP Performance Measures
As supplemental information, we are providing performance measures that are based on methodologies other than U.S. generally accepted accounting principles (“non-GAAP”). We believe the non-GAAP measures below are useful measures of our core business activities, are important metrics in estimating the value of an asset management business and may enable more appropriate comparison to our peers. These non-GAAP measures should not be a substitute for financial measures calculated in accordance with U.S. generally accepted accounting principles (“GAAP”) and may be calculated differently by other companies. The following schedule reconciles GAAP measures to non-GAAP measures for the years ended December 31, 2020, 2019, and 2018, respectively.

| Year Ended December 31,
(in thousands, except percentages and per share data) | 2020 |  | 2019 |  | 2018
Total revenue | $ | 126,388 |  |  | $ | 136,624 |  |  | $ | 145,628 |
Net operating income, GAAP basis | $ | 45,538 |  |  | $ | 47,935 |  |  | $ | 71,256 |
Non-GAAP adjustments: |  |  |  |  |
Gains (losses) on deferred compensation plan investments, net(1) | 2,219 |  |  | 5,977 |  |  | (2,122) |
Net operating income, as adjusted, non-GAAP basis(2) | 47,757 |  |  | 53,912 |  |  | 69,134 |
Non-GAAP adjustments: |  |  |  |  |
Tax provision on net operating income, as adjusted, non-GAAP basis(3) | (12,668) |  |  | (13,680) |  |  | (19,542) |
Net operating income, as adjusted, after tax, non-GAAP basis(4) | $ | 35,089 |  |  | $ | 40,232 |  |  | $ | 49,592 |
Net operating income, as adjusted after tax per diluted share, non-GAAP basis(5) | $ | 10.91 |  |  | $ | 11.71 |  |  | $ | 14.11 |
Diluted weighted average shares outstanding, GAAP basis | 3,215 |  |  | 3,437 |  |  | 3,515 |
Operating profit margin, GAAP basis | 36 | % |  | 35 | % |  | 49 | %
Operating profit margin, as adjusted, non-GAAP basis(6) | 38 | % |  | 39 | % |  | 47 | %

(1) Gains (losses) on deferred compensation plan investments, net: The gain (loss) on deferred compensation plan investments, which increases (decreases) deferred compensation expense included in operating income, is removed from operating income in the calculation because it is offset by an equal amount in investment income (loss) below net operating income on the income statement, and thus has no impact on net income attributable to us.
(2) Net operating income, as adjusted: This non-GAAP measure represents our net operating income adjusted to exclude the impact on compensation expense of gains and losses on investments in the deferred compensation plan.
(3) Tax provision on net operating income, as adjusted: This non-GAAP measure represents the tax provision excluding the impact of investment related activity and is calculated by applying the unconsolidated effective tax rate to net operating income, as adjusted.
(4) Net operating income, as adjusted, after tax: This non-GAAP measure deducts from the net operating income, as adjusted, the tax provision on net operating income, as adjusted.
(5) Net operating income, as adjusted after tax per diluted share: This non-GAAP measure was calculated by dividing the net operating income, as adjusted after tax, by diluted weighted average shares outstanding.
(6) Operating profit margin, as adjusted: This non-GAAP measure was calculated by dividing the net operating income, as adjusted, by total revenue.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements. We do not have any obligation under a guarantee contract, or a retained or contingent interest in assets or similar arrangement that serves as credit, liquidity or market risk support for such assets, or any other obligation, contingent or otherwise, under a contract that would be accounted for as a derivative instrument or arising out of a variable interest.
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Critical Accounting Policies and Estimates
Consolidation. We consolidate all subsidiaries and certain investments in which we have a controlling interest. We are generally deemed to have a controlling interest when we own the majority of the voting interest of a voting rights entity (“VRE”) or are deemed to be the primary beneficiary of a variable interest entity (“VIE”). A VIE is an entity that lacks sufficient equity to finance its activities, or any entity whose equity holders do not have defined power to direct the activities of the entity normally associated with an equity investment. Our analysis to determine whether an entity is a VIE or a VRE involves judgment and considers several factors, including an entity’s legal organization, equity structure, the rights of the investment holders, our ownership interest in the entity, and our contractual involvement with the entity. We continually review and reconsider our VIE or VRE conclusions upon the occurrence of certain events, such as changes to our ownership interest, or amendments to contract documents.
Provisions for Income Taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns.
Revenue Recognition on Performance-Based Advisory Contracts. We have certain investment advisory contracts in which a portion of the fees are based on investment performance achieved in the respective client portfolio in excess of a specified hurdle rate. These fees are calculated based on client investment results over rolling five-year periods. We record performance-based fees at the end of the contract measurement period because the performance-based fees earned are constrained based on movements in the financial markets.
Revenue Recognition when Acting as an Agent vs. Principal. The Funds have selected and contractually engaged certain vendors to fulfill various services to benefit the Funds’ shareholders or to satisfy regulatory requirements of the Funds. These services include, among others, required fund shareholder mailings, registration services, and legal and audit services. DHCM, in fulfilling a portion of its role under the administration agreement with the Funds, acts as agent to pay these obligations of the Funds. Each vendor is independently responsible for fulfillment of the services it has been engaged to provide and negotiates fees and terms with the management and board of trustees of the Funds. The fee that the Funds pay to DHCM is reviewed annually by the Funds’ board of trustees and specifically considers the contractual expenses that DHCM pays on behalf of the Funds. As a result, DHCM is not involved in the delivery or pricing of these services and bears no risk related to these services. Revenue has been recorded net of these Fund expenses, as appropriate for this agency relationship.

ITEM 7A. | Quantitative and Qualitative Disclosures About Market Risk

Our revenues and net income are based primarily on the value of our AUM. Accordingly, declines in financial market values directly and negatively impact our investment advisory revenues and net income.
We invest in the Funds, which are market risk sensitive financial instruments. These investments have inherent market risk in the form of price risk; that is, the potential future loss of value that would result from a decline in their fair value. Market prices fluctuate, and the amount realized upon subsequent sale may differ significantly from the reported market value.
During the first quarter of 2020, the impact of the COVID-19 pandemic spread rapidly on a global basis and caused increasing disruption to populations, economic activity, and the global financial markets. While markets recovered sharply in the second, third, and fourth quarters of 2020, the impact and ongoing uncertainty related to the COVID-19 pandemic continued through the end of 2020.
The table below summarizes our market risks as of December 31, 2020, and shows the effects of a hypothetical 10% increase and decrease in investments.

| Fair Value as of December 31, 2020 |  | Fair Value Assuming a Hypothetical 10% Increase |  | Fair Value Assuming a Hypothetical 10% Decrease
Equity investments | $ | 75,115,159 |  |  | $ | 82,626,675 |  |  | $ | 67,603,643 |
Fixed Income investments | 53,285,977 |  |  | 58,614,575 |  |  | 47,957,379 |
Total | $ | 128,401,136 |  |  | $ | 141,241,250 |  |  | $ | 115,561,022 |

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ITEM 8. | Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Diamond Hill Investment Group, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Diamond Hill Investment Group, Inc. and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of income, shareholders’ equity and redeemable noncontrolling interest, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 25, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Evaluation of the assets under management data used in the calculation of sub-advisory and separately managed account investment advisory fee revenue
As discussed in Note 2 to the consolidated financial statements, the Company recognizes revenue for its sub-advisory and separately managed account investment advisory agreements based on a percentage of its assets under management (AUM). The Company recognized $31.0 million in investment advisory fees related to sub-advised funds and separately managed accounts during the year ended December 31, 2020. AUM is an input to the calculation of investment advisory fee revenue. Specifically, as it pertains to these accounts, the inputs to the AUM calculation and the calculated AUM value are transmitted through multiple information technology (IT) systems used in the calculation of investment advisory fee revenue.
35

We identified the evaluation of the AUM data used in the calculation of sub-advisory and separately managed account investment advisory fee revenue as a critical audit matter. There is a high degree of auditor judgment required to perform procedures to address the Company’s use of multiple IT systems to maintain the AUM data. Such procedures require specialized skills to test the AUM data as it is processed through multiple IT systems.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the critical audit matter. This included controls related to the inputs to the AUM calculation, as well as controls over the reconciliation of AUM between IT systems. We involved IT professionals with specialized skills and knowledge, who assisted in the testing of application and related general IT controls relevant to the IT systems used to maintain AUM data. We compared AUM used in the calculation of investment advisory fees to the source IT systems for a selection of accounts.
/s/ KPMG LLP
We have served as the Company’s auditor since 2012.
Columbus, Ohio
February 25, 2021
36

Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Diamond Hill Investment Group, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Diamond Hill Investment Group, Inc.’s and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of income, shareholders’ equity and redeemable noncontrolling interest, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements), and our report dated February 25, 2021 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Columbus, Ohio
February 25, 2021
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Table of Contents
Diamond Hill Investment Group, Inc.
Consolidated Balance Sheets

| December 31,
| 2020 |  | 2019
ASSETS |  |  |
Cash and cash equivalents | $ | 98,478,202 |  |  | $ | 93,176,253 |
Investments | 128,401,136 |  |  | 139,437,178 |
Accounts receivable | 17,805,864 |  |  | 17,223,362 |
Prepaid expenses | 2,977,759 |  |  | 2,857,468 |
Income taxes receivable | 256,538 |  |  | 3,849,099 |
Property and equipment, net of depreciation | 6,740,396 |  |  | 5,733,737 |
Deferred taxes | 8,437,446 |  |  | 10,386,853 |
Total assets | $ | 263,097,341 |  |  | $ | 272,663,950 |
LIABILITIES AND SHAREHOLDERS’ EQUITY |  |  |
Liabilities |  |  |
Accounts payable and accrued expenses | $ | 8,002,303 |  |  | $ | 8,671,731 |
Accrued incentive compensation | 28,400,000 |  |  | 26,615,510 |
Deferred compensation | 33,241,952 |  |  | 30,342,204 |
Total liabilities | 69,644,255 |  |  | 65,629,445 |
Redeemable noncontrolling interest | 9,372,333 |  |  | 14,178,824 |
Permanent Shareholders’ Equity |  |  |
Common stock, no par value 7,000,000 shares authorized; 3,168,823 issued and outstanding at December 31, 2020 (inclusive of 183,718 unvested shares); 3,294,672 issued and outstanding at December 31, 2019 (inclusive of 227,844 unvested shares) | 80,810,946 |  |  | 95,853,477 |
Preferred stock, undesignated, 1,000,000 shares authorized and unissued | — |  |  | — |
Deferred equity compensation | (14,748,118) |  |  | (20,331,890) |
Retained Earnings | 118,017,925 |  |  | 117,334,094 |
Total permanent shareholders’ equity | 184,080,753 |  |  | 192,855,681 |
Total liabilities and shareholders’ equity | $ | 263,097,341 |  |  | $ | 272,663,950 |
Book value per share | $ | 58.09 |  |  | $ | 58.54 |

The accompanying notes are an integral part of these consolidated financial statements.
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Diamond Hill Investment Group, Inc.
Consolidated Statements of Income

| Year Ended December 31,
| 2020 |  | 2019 |  | 2018
REVENUES: |  |  |  |  |
Investment advisory | $ | 119,125,230 |  |  | $ | 128,009,409 |  |  | $ | 135,317,805 |
Mutual fund administration, net | 7,262,488 |  |  | 8,614,971 |  |  | 10,309,943 |
Total revenue | 126,387,718 |  |  | 136,624,380 |  |  | 145,627,748 |
OPERATING EXPENSES: |  |  |  |  |
Compensation and related costs, excluding deferred compensation expense | 58,291,670 |  |  | 60,264,117 |  |  | 55,975,361 |
Deferred compensation expense (benefit) | 2,218,898 |  |  | 5,976,938 |  |  | (2,121,691) |
General and administrative | 11,002,572 |  |  | 13,277,843 |  |  | 11,648,925 |
Sales and marketing | 5,999,846 |  |  | 5,867,297 |  |  | 5,242,848 |
Mutual fund administration | 3,336,575 |  |  | 3,302,767 |  |  | 3,625,898 |
Total operating expenses | 80,849,561 |  |  | 88,688,962 |  |  | 74,371,341 |
NET OPERATING INCOME | 45,538,157 |  |  | 47,935,418 |  |  | 71,256,407 |
Investment income (loss), net | 6,584,849 |  |  | 30,507,375 |  |  | (6,272,678) |
INCOME BEFORE TAXES | 52,123,006 |  |  | 78,442,793 |  |  | 64,983,729 |
Income tax expense | (13,957,868) |  |  | (18,688,474) |  |  | (18,669,341) |
NET INCOME | 38,165,138 |  |  | 59,754,319 |  |  | 46,314,388 |
Net loss (income) attributable to redeemable noncontrolling interest | 495,407 |  |  | (4,795,295) |  |  | 1,061,441 |
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ | 38,660,545 |  |  | $ | 54,959,024 |  |  | $ | 47,375,829 |
Earnings per share attributable to common shareholders |  |  |  |  |
Basic | $ | 12.03 |  |  | $ | 15.99 |  |  | $ | 13.49 |
Diluted | $ | 12.03 |  |  | $ | 15.99 |  |  | $ | 13.48 |
Weighted average shares outstanding |  |  |  |  |
Basic | 3,214,564 |  |  | 3,436,574 |  |  | 3,512,470 |
Diluted | 3,214,564 |  |  | 3,436,641 |  |  | 3,514,528 |

The accompanying notes are an integral part of these consolidated financial statements.
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Diamond Hill Investment Group, Inc.
Consolidated Statements of Shareholders’ Equity and Redeemable Noncontrolling Interest

| Shares Outstanding |  | Common Stock |  | Deferred Equity Compensation |  | Retained Earnings |  | Total |  | Redeemable Noncontrolling Interest
Balance at January 1, 2018 | 3,470,428 |  |  | $ | 118,209,111 |  |  | $ | (19,134,963) |  |  | $ | 73,369,672 |  |  | $ | 172,443,820 |  |  | $ | 20,076,806 |
Issuance of restricted stock grants | 73,025 |  |  | 13,654,592 |  |  | (13,654,592) |  |  | — |  |  | — |  |  | — |
Amortization of restricted stock grants | — |  |  | — |  |  | 6,664,875 |  |  | — |  |  | 6,664,875 |  |  | — |
Common stock issued as incentive compensation | 20,153 |  |  | 4,109,197 |  |  | — |  |  | — |  |  | 4,109,197 |  |  | — |
Issuance of common stock related to 401k plan match | 11,967 |  |  | 2,231,735 |  |  | — |  |  | — |  |  | 2,231,735 |  |  | — |
Shares withheld related to employee tax withholding | (9,918) |  |  | (1,925,700) |  |  | — |  |  | — |  |  | (1,925,700) |  |  | — |
Repurchases of common stock | (45,470) |  |  | (7,229,249) |  |  | — |  |  | — |  |  | (7,229,249) |  |  | — |
Forfeiture of restricted stock grants | (20,900) |  |  | (4,116,626) |  |  | 4,116,626 |  |  | — |  |  | — |  |  | — |
Cash dividend paid of $8.00 per share | — |  |  | — |  |  | — |  |  | (28,094,564) |  |  | (28,094,564) |  |  | — |
Net income | — |  |  | — |  |  | — |  |  | 47,375,829 |  |  | 47,375,829 |  |  | (1,061,441) |
Net subscriptions of consolidated funds | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 27,219,682 |
New consolidations of Company sponsored investments | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 16,444,640 |
Balance at December 31, 2018 | 3,499,285 |  |  | $ | 124,933,060 |  |  | $ | (22,008,054) |  |  | $ | 92,650,937 |  |  | $ | 195,575,943 |  |  | $ | 62,679,687 |
Issuance of restricted stock grants | 53,969 |  |  | 7,471,799 |  |  | (7,471,799) |  |  | — |  |  | — |  |  | — |
Amortization of restricted stock grants | — |  |  | — |  |  | 6,584,485 |  |  | — |  |  | 6,584,485 |  |  | — |
Common stock issued as incentive compensation | 24,048 |  |  | 3,655,296 |  |  | — |  |  | — |  |  | 3,655,296 |  |  | — |
Issuance of common stock related to 401k plan match | 17,651 |  |  | 2,496,936 |  |  | — |  |  | — |  |  | 2,496,936 |  |  | — |
Shares withheld related to employee tax withholding | (9,928) |  |  | (1,390,482) |  |  | — |  |  | — |  |  | (1,390,482) |  |  | — |
Forfeiture of restricted stock grants | (14,200) |  |  | (2,563,478) |  |  | 2,563,478 |  |  | — |  |  | — |  |  | — |
Repurchases of common stock | (276,153) |  |  | (38,749,654) |  |  | — |  |  | — |  |  | (38,749,654) |  |  | — |
Cash dividend paid of $9.00 per share | — |  |  | — |  |  | — |  |  | (30,275,867) |  |  | (30,275,867) |  |  | — |
Net income | — |  |  | — |  |  | — |  |  | 54,959,024 |  |  | 54,959,024 |  |  | 4,795,295 |
Net subscriptions of consolidated funds | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 8,095,940 |
Net deconsolidations of Company sponsored investments | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (61,392,098) |
Balance at December 31, 2019 | 3,294,672 |  |  | $ | 95,853,477 |  |  | $ | (20,331,890) |  |  | $ | 117,334,094 |  |  | $ | 192,855,681 |  |  | $ | 14,178,824 |
Issuance of restricted stock grants | 22,099 |  |  | 2,548,440 |  |  | (2,548,440) |  |  | — |  |  | — |  |  | — |
Amortization of restricted stock grants | — |  |  | — |  |  | 5,227,574 |  |  | — |  |  | 5,227,574 |  |  | — |
Common stock issued as incentive compensation | 23,640 |  |  | 3,396,359 |  |  | — |  |  | — |  |  | 3,396,359 |  |  | — |
Issuance of common stock related to 401k plan match | 20,976 |  |  | 2,511,746 |  |  | — |  |  | — |  |  | 2,511,746 |  |  | — |
Shares withheld related to employee tax withholding | (19,189) |  |  | (1,947,456) |  |  | — |  |  | — |  |  | (1,947,456) |  |  | — |
Forfeiture of restricted stock grants | (15,625) |  |  | (2,904,638) |  |  | 2,904,638 |  |  | — |  |  | — |  |  | — |
Repurchases of common stock | (157,750) |  |  | (18,646,982) |  |  | — |  |  | — |  |  | (18,646,982) |  |  | — |
Cash dividend paid of $12.00 per share | — |  |  | — |  |  | — |  |  | (37,976,714) |  |  | (37,976,714) |  |  | — |
Net income | — |  |  | — |  |  | — |  |  | 38,660,545 |  |  | 38,660,545 |  |  | (495,407) |
Net redemptions of consolidated funds | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (4,311,084) |
Balance at December 31, 2020 | 3,168,823 |  |  | $ | 80,810,946 |  |  | $ | (14,748,118) |  |  | $ | 118,017,925 |  |  | $ | 184,080,753 |  |  | $ | 9,372,333 |

The accompanying notes are an integral part of these consolidated financial statements.
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Diamond Hill Investment Group, Inc.
Consolidated Statements of Cash Flows

| Year Ended December 31,
| 2020 |  | 2019 |  | 2018
CASH FLOWS FROM OPERATING ACTIVITIES: |  |  |  |  |
Net Income | $ | 38,165,138 |  |  | $ | 59,754,319 |  |  | $ | 46,314,388 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |  |  |
Depreciation | 992,836 |  |  | 1,164,207 |  |  | 1,159,380 |
Share-based compensation | 7,739,320 |  |  | 9,081,421 |  |  | 8,896,610 |
Increase in accounts receivable | (582,502) |  |  | (5,021,516) |  |  | (1,014,839) |
Change in current income taxes | 3,592,561 |  |  | (6,617,780) |  |  | 6,883,643 |
Change in deferred income taxes | 1,949,407 |  |  | 1,079,247 |  |  | (5,622,396) |
Net (gain) loss on investments | (3,005,441) |  |  | (21,058,463) |  |  | 14,297,382 |
Net change in securities held by Consolidated Funds | 3,179,362 |  |  | 6,286,645 |  |  | (52,168,968) |
Increase in accrued incentive compensation | 5,180,849 |  |  | 3,516,639 |  |  | 5,366,864 |
Increase in deferred compensation | 2,899,748 |  |  | 7,954,330 |  |  | 1,907,084 |
Other changes in assets and liabilities | (338,793) |  |  | 827,194 |  |  | 2,111,443 |
Net cash provided by operating activities | 59,772,485 |  |  | 56,966,243 |  |  | 28,130,591 |
CASH FLOWS FROM INVESTING ACTIVITIES: |  |  |  |  |
Purchase of property and equipment | (2,450,421) |  |  | (707,790) |  |  | (781,951) |
Purchase of Company sponsored investments | (14,852,892) |  |  | (14,351,062) |  |  | (6,332,090) |
Proceeds from sale of Company sponsored investments | 25,715,013 |  |  | 48,637,779 |  |  | 2,853,144 |
Net cash on deconsolidation of Company sponsored investments | — |  |  | (22,723,853) |  |  | — |
Net cash provided by (used in) investing activities | 8,411,700 |  |  | 10,855,074 |  |  | (4,260,897) |
CASH FLOWS FROM FINANCING ACTIVITIES: |  |  |  |  |
Value of shares withheld related to employee tax withholding | (1,947,456) |  |  | (1,390,482) |  |  | (1,925,700) |
Payment of dividends | (37,976,714) |  |  | (30,275,867) |  |  | (28,094,564) |
Net subscriptions (redemptions) received from redeemable noncontrolling interest holders | (4,311,084) |  |  | 11,340,880 |  |  | 21,207,770 |
Repurchase of common stock | (18,646,982) |  |  | (38,749,654) |  |  | (7,229,249) |
Net cash used in financing activities | (62,882,236) |  |  | (59,075,123) |  |  | (16,041,743) |
CASH AND CASH EQUIVALENTS |  |  |  |  |
Net change during the year | 5,301,949 |  |  | 8,746,194 |  |  | 7,827,951 |
At beginning of year | 93,176,253 |  |  | 84,430,059 |  |  | 76,602,108 |
At end of year | $ | 98,478,202 |  |  | $ | 93,176,253 |  |  | $ | 84,430,059 |
Supplemental cash flow information: |  |  |  |  |
Income taxes paid | $ | 8,415,900 |  |  | $ | 24,227,006 |  |  | $ | 17,408,094 |
Supplemental disclosure of non-cash transactions: |  |  |  |  |
Common stock issued as incentive compensation | 3,396,359 |  |  | 3,655,296 |  |  | 4,109,197 |
Charitable donation of corporate investments | — |  |  | — |  |  | 1,989,803 |
Net (redemptions) subscriptions of ETF Shares for marketable securities | — |  |  | (3,244,940) |  |  | 6,282,621 |

The accompanying notes are an integral part of these consolidated financial statements.
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Diamond Hill Investment Group, Inc.
Notes to Consolidated Financial Statements
Note 1 Business and Organization
Diamond Hill Investment Group, Inc. (the “Company”), an Ohio corporation, derives its consolidated revenues and net income from investment advisory and fund administration services.
Diamond Hill Capital Management, Inc. ("DHCM"), an Ohio corporation, is a wholly owned subsidiary of the Company and a
registered investment adviser. DHCM is the investment adviser to the Diamond Hill Funds (the "Funds"), a series of open-end
mutual funds. DHCM is also administrator for the Funds. The Company also provides investment advisory services to
separately managed accounts and provides sub-advisory services to other mutual funds.
Note 2 Significant Accounting Policies
Basis of Presentation
The accompanying Consolidated Financial Statements of the Company have been prepared pursuant to the rules and regulations of the SEC and in accordance with the instructions to Form 10-K. The Company believes that the disclosures contained herein are adequate to make the information presented not misleading.
These Consolidated Financial Statements reflect, in the opinion of the Company, all material adjustments (which include only normal recurring adjustments) necessary to fairly present the Company’s financial position as of December 31, 2020 and 2019, and results of operations for the years ended December 31, 2020, 2019 and 2018.
For further information regarding the risks to our business, refer to the consolidated financial statements and notes thereto
included in “Part I – Item 1A. – Risk Factors” of this Annual Report on Form 10-K.
Use of Estimates
The preparation of the Consolidated Financial Statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenue and expense during the reporting period. Estimates have been prepared based on the most current and best available information, but actual results could differ materially from those estimates.
Reclassification
Certain prior period amounts and disclosures may have been reclassified to conform to the current period’s financial presentation.
Book Value Per Share
Book value per share is computed by dividing total shareholders’ equity by the number of shares issued and outstanding at the end of the measurement period.
Principles of Consolidation
The accompanying consolidated financial statements include the operations of the Company and its controlled subsidiaries. All inter-company transactions and balances have been eliminated in consolidation.
The Company holds certain investments in the Funds, and previously held an investment in an exchange traded fund (the “ETF”), for general corporate investment purposes, to provide seed capital for newly formed strategies or to add capital to existing strategies. The Funds are organized in a series fund structure in which there are multiple mutual funds within one Trust. The Trust is an open-end investment company registered under the 1940 Act. The ETF was an individual series of ETF Series Solutions, which was also an open-end investment company registered under the 1940 Act. The ETF liquidated and its assets were distributed to its shareholders on April 5, 2019. Each of the individual mutual funds represents (and the ETF represented) a separate share class of a legal entity organized under the Trust.
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The Company performs its consolidation analysis at the individual mutual fund and ETF level and has concluded the mutual funds are, and the ETF was, VREs because the structure of the investment product is such that the shareholders are deemed to have the power through voting rights to direct the activities that most significantly impact the entity's economic performance. To the extent material, these investment products are consolidated if Company ownership, directly or indirectly, represents a majority interest (greater than 50%). The Company records redeemable noncontrolling interests in consolidated investments for which the Company's ownership is less than 100%. The Company has consolidated the Diamond Hill International Fund and the Diamond Hill Global Fund (together, the "Consolidated Funds") as of December 31, 2020. The Company deconsolidated the ETF, the Diamond Hill Core Bond Fund and the Diamond Hill High Yield Fund during the year ended December 31, 2019 as the Company's ownership declined to less than 50%.
Redeemable Noncontrolling Interest
Redeemable noncontrolling interest represents third-party interests in the Consolidated Funds. This interest is redeemable at the option of the investors and therefore is not treated as permanent equity. Redeemable noncontrolling interest is recorded at redemption value, which approximates the fair value each reporting period.
Segment Information
Management has determined that the Company operates in one business segment, which is providing investment management and administration services to mutual funds and separately managed accounts. Therefore, the Company does not present disclosures relating to operating segments in annual or interim financial statements.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits and money market mutual funds held by DHCM.
Accounts Receivable
The Company records accounts receivable when they are due and presents them on the balance sheet net of any allowance for doubtful accounts. Accounts receivable are written off when they are determined to be uncollectible. Any allowance for doubtful accounts is estimated based on the Company’s historical losses, existing conditions in the industry, and the financial stability of the individual or entity that owes the receivable. No allowance for doubtful accounts was deemed necessary at either December 31, 2020 or 2019. Accounts receivable from the Funds were $10.5 million and $10.7 million as of December 31, 2020 and 2019, respectively.
Investments
The Company’s management determines the appropriate classification of its investments at the time of purchase and re-evaluates its determination at each reporting period.
Investments in the Funds that DHCM advises where the Company has neither control nor the ability to exercise significant influence, as well as securities held in the Consolidated Funds, are measured at fair value based on quoted market prices. Unrealized gains and losses are recorded as investment income (loss) in the Company's consolidated statements of income.
Investments classified as equity method investments represent investments in which the Company owns between 20-50% of the outstanding voting interests in the entity or when it is determined that the Company is able to exercise significant influence but not control over the investments. When using the equity method, the Company recognizes its respective share of the investee’s net income or loss for the period which is recorded as investment income in the Company’s consolidated statements of income.
Property and Equipment
Property and equipment, consisting of leasehold improvements, computer equipment, capitalized software, furniture, and fixtures, are carried at cost less accumulated depreciation. Accumulated depreciation was $7.4 million and $6.4 million as of December 31, 2020 and 2019, respectively. Depreciation is calculated using the straight-line method over the estimated lives of the assets.
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Revenue Recognition – General
The Company recognizes revenue when it satisfies performance obligations under the terms of a contract with a client. The Company earns substantially all of its revenue from investment advisory and fund administration contracts. Investment advisory and administration fees, generally calculated as a percentage of AUM, are recorded as revenue as services are performed. In addition to fixed fees based on a percentage of AUM, certain client accounts also provide periodic performance-based fees.
Revenue earned for the years ended December 31, 2020, 2019 and 2018 under contracts with clients include:

| Year Ended December 31, 2020
| Investment advisory |  | Mutual fund administration, net |  | Total revenue
Proprietary funds | $ | 88,103,499 |  |  | $ | 7,262,488 |  |  | $ | 95,365,987 |
Sub-advised funds and separately managed accounts | 31,021,731 |  |  | — |  |  | 31,021,731 |
| $ | 119,125,230 |  |  | $ | 7,262,488 |  |  | $ | 126,387,718 |

| Year Ended December 31, 2019
| Investment advisory |  | Mutual fund administration, net |  | Total revenue
Proprietary funds | $ | 97,327,310 |  |  | $ | 8,614,971 |  |  | $ | 105,942,281 |
Sub-advised funds and separately managed accounts | 30,682,099 |  |  | — |  |  | 30,682,099 |
| $ | 128,009,409 |  |  | $ | 8,614,971 |  |  | $ | 136,624,380 |

| Year Ended December 31, 2018
| Investment advisory |  | Mutual fund administration, net |  | Total revenue
Proprietary funds | $ | 105,228,977 |  |  | $ | 10,309,943 |  |  | $ | 115,538,920 |
Sub-advised funds and separately managed accounts | 30,088,828 |  |  | — |  |  | 30,088,828 |
| $ | 135,317,805 |  |  | $ | 10,309,943 |  |  | $ | 145,627,748 |

Revenue Recognition – Investment Advisory Fees
The Company’s investment advisory contracts have a single performance obligation (the investment advisory services provided to the client) as the promised services are not separately identifiable from other promises in the contracts, and therefore, are not distinct. All performance obligations to provide advisory services are satisfied over time, and the Company recognizes revenue as time passes.
The fees the Company receives for its services under its investment advisory contracts are based on our AUM, which changes based on the value of securities held under each advisory contract. These fees are thereby constrained and represent variable consideration, and they are excluded from revenue until the AUM on which the Company’s client is billed is no longer subject to market fluctuations.
The Company also provides services to model delivery programs in which the Company provides its strategy model portfolio to the sponsor of the model delivery. The Company is paid a portion of the model delivery fee for its services by the program sponsor at a pre-determined rate based on assets in the program. Model delivery program revenues were $2.7 million, $2.0 million and $1.5 million for the years ended December 31, 2020, 2019 and 2018, respectively. Model delivery program revenue is included in investment advisory fees in the consolidated statements of income.
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Revenue Recognition – Performance-Based Fees
The Company manages certain client accounts that provide for performance-based fees. These fees are calculated based on client investment results over rolling five-year periods. The Company records performance-based fees at the end of the contract measurement period because the performance-based fees earned are constrained based on movements in the financial markets. During the years ended December 31, 2020, 2019, and 2018, the Company recorded $0.5 million, $1.3 million, and $1.4 million, respectively, in performance-based fees. The table below shows AUM subject to performance-based fees and the amount of performance-based fees that would be recognized based upon investment results as of December 31, 2020:

| As of December 31, 2020
| AUM subject to performance-based fees |  | Unearned performance-based fees
Contractual Period Ending: |  |  |
Quarter Ending September 30, 2021 | $ | 339,721,553 |  |  | $ | 9,228,080 |
Quarter Ending December 31, 2021 | 60,887,198 |  |  | — |
Total | $ | 400,608,751 |  |  | $ | 9,228,080 |

The contractual end dates highlight the time remaining until the performance-based fees are scheduled to be earned. The amount of performance-based fees that would be recognized based upon investments results as of December 31, 2020, will increase or decrease based on future client investment results through the contractual period end. The Company cannot assure that it will earn the unearned amounts set forth above.
Revenue Recognition – Mutual Fund Administration
DHCM has an administrative and transfer agency services agreement with the Funds under which DHCM performs certain services for each Fund. These services include performance obligations such as mutual fund administration, fund accounting, transfer agency, and other related functions. These services are performed concurrently under DHCM's agreement with the Funds, all performance obligations to provide these administrative services are satisfied over time, and the Company recognizes the related revenue as time progresses. Each Fund pays DHCM a fee for performing these services, which is calculated using an annual rate times the average daily net assets of each respective Fund share class. These fees are thereby constrained and represent variable consideration, and they are excluded from revenue until the AUM on which DHCM bills the Funds is no longer subject to market fluctuations.
The Funds have selected and contractually engaged certain vendors to fulfill various services to benefit the Funds’ shareholders or to satisfy regulatory requirements of the Funds. These services include, among others, required shareholder mailings, federal, and state registrations, and legal and audit services. DHCM, in fulfilling a portion of its role under the administration agreement with the Funds, acts as agent and pays for these services on behalf of the Funds. Each vendor is independently responsible for fulfillment of the services it has been engaged to provide and negotiates its fees and terms directly with the management and board of trustees of the Funds. Each year, the Funds' board of trustees reviews the fee that each Fund pays to DHCM, and specifically considers the contractual expenses that DHCM pays on behalf of the Funds. As a result, DHCM is not involved in the delivery or pricing of these services, and bears no risk related to these services. Revenue has been recorded net of these Fund-related expenses. In addition, DHCM advances the upfront commissions that are paid to brokers who sell Class C shares of the Funds. These advances are capitalized and amortized over 12 months to correspond with the repayments DHCM receives from the principal underwriter to recoup this commission advancement.
Mutual fund administration gross and net revenue are summarized below:

| Year Ended December 31,
| 2020 |  | 2019 |  | 2018
Mutual fund administration: |  |  |  |  |
Administration revenue, gross | $ | 22,296,535 |  |  | $ | 22,569,946 |  |  | $ | 24,463,538 |
Fund related expense | (15,048,850) |  |  | (13,989,139) |  |  | (14,183,370) |
Revenue, net of related expenses | 7,247,685 |  |  | 8,580,807 |  |  | 10,280,168 |
DHCM C-Share financing: |  |  |  |  |
Broker commission advance repayments | 245,594 |  |  | 240,459 |  |  | 332,680 |
Broker commission amortization | (230,791) |  |  | (206,295) |  |  | (302,905) |
Financing activity, net | 14,803 |  |  | 34,164 |  |  | 29,775 |
Mutual fund administration revenue, net | $ | 7,262,488 |  |  | $ | 8,614,971 |  |  | $ | 10,309,943 |

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Income Taxes
The Company accounts for current and deferred income taxes through an asset and liability approach. Deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The Company is subject to examination by federal and applicable state and local jurisdictions for various tax periods. The Company’s income tax positions are based on research and interpretations of the income tax laws and rulings in each of the jurisdictions in which it does business. Due to the subjectivity of interpretations of laws and rulings in each jurisdiction, the differences and interplay in tax laws among those jurisdictions, and the inherent uncertainty in estimating the final resolution of complex tax audit matters, the Company’s estimates of income tax liabilities may differ from actual payments or assessments. The Company regularly assesses its positions with regard to tax exposures and records liabilities for these uncertain tax positions and related interest and penalties, if any, according to the principles of FASB ASC 740, Income Taxes. The Company records interest and penalties within income tax expense on the income statement. See Note 9.
Earnings Per Share
Basic earnings per share (“EPS”) excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period, which includes unvested restricted shares. Diluted EPS reflects the dilutive effect of
outstanding and unvested restricted stock units, if any. See Note 10.
Recently Adopted Accounting Guidance
In August 2018, FASB issued Accounting Standards Update ("ASU") No. 2018-13, “Fair Value Measurements.” This update makes certain revisions to existing disclosure requirements for fair value measurement. ASU No. 2018-13 does not change fair value measurements already required or permitted by existing standards. ASU No. 2018-13 is effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company adopted this guidance on January 1, 2020, without any impact on the Company’s consolidated financial statements.
In August 2018, FASB issued ASU No. 2018-15 “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” This update required implementation costs incurred in cloud computing arrangements to be deferred and recognized over the term of the hosting arrangement. A hosting arrangement is an agreement that allows customers to access and use software on an as-needed basis without having possession of the software. Beginning on January 1, 2020, the Company was required to defer such qualifying implementation costs. As of December 31, 2020, the Company capitalized an immaterial amount of implementation costs incurred in a cloud computing arrangement. The Company adopted this guidance on January 1, 2020 using the prospective method of adoption. Accordingly, the adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
Note 3 Investments
The following table summarizes the carrying value of the Company's investments as of December 31, 2020 and 2019:

| As of December 31,
| 2020 |  | 2019
Fair value investments: |  |  |
Securities held in Consolidated Funds(a) | $ | 33,233,307 |  |  | $ | 36,248,360 |
Company-sponsored investments | 95,167,829 |  |  | 42,039,044 |
Company-sponsored equity method investments | — |  |  | 61,149,774 |
Total Investments | $ | 128,401,136 |  |  | $ | 139,437,178 |

(a) Of the securities held in the Consolidated Funds as of December 31, 2020, the Company directly held $23.6 million and non-controlling shareholders held $9.6 million. Of the securities held in the Consolidated Funds as of December 31, 2019, the Company directly held $21.1 million and non-controlling shareholders held $15.1 million.
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As of December 31, 2020, securities held by the Company in the Consolidated Funds consisted of the Diamond Hill Global Fund and the Diamond Hill International Fund as our ownership percentage in these investments was greater than 50%.
As of December 31, 2019, securities held in the Consolidated Funds consisted of the Diamond Hill Global Fund and the Diamond Hill International Fund as our ownership percentage in these investments was greater than 50%. During the year ended December 31, 2019, the Company began consolidating the Diamond Hill International Fund as ownership increased above 50% and de-consolidated the ETF, the Diamond Hill Core Bond Fund and the Diamond Hill High Yield Fund as our ownership in each declined to less than 50%.
The components of net investment income (loss) are as follows:

| For the Year Ended December 31,
| 2020 |  | 2019 |  | 2018
Realized gains (losses) | $ | (1,488,059) |  |  | $ | 9,056,152 |  |  | $ | 2,143,695 |
Unrealized gains (losses) | 5,348,243 |  |  | 15,086,747 |  |  | (16,067,048) |
Dividend income | 2,824,542 |  |  | 5,350,146 |  |  | 2,814,026 |
Interest income | — |  |  | 987,240 |  |  | 4,857,261 |
Other investment income (loss) | (99,877) |  |  | 27,090 |  |  | (20,612) |
Investment income (loss), net | $ | 6,584,849 |  |  | $ | 30,507,375 |  |  | $ | (6,272,678) |

Company-Sponsored Equity Method Investments
As of December 31, 2020, the Company had no equity method investments. During 2020, there were periods of time when the Company’s ownership in the Diamond Hill Research Opportunities Fund 1 and the Diamond Hill Core Bond Fund was between 20% and 50%, respectively, and thus, a portion of these Funds’ income is included in the table below for the year ended December 31, 2020.
As of December 31, 2019, the Company’s equity method investments consisted of the Diamond Hill Research Opportunities Fund and the Diamond Hill Core Bond Fund, and the Company’s ownership percentage in each of these investments was 23% and 36%, respectively. During 2019, there were periods of time where the Company’s ownership in the Diamond Hill High Yield Fund was between 20% and 50%, respectively, and thus, a portion of that Fund’s income is included in the table below for the year ended December 31, 2019. During 2019, there were periods of time where the Company’s ownership in the Diamond Hill Core Bond Fund was greater than 50%, and thus, a portion of that Fund’s income is excluded from the table below for the year ended December 31, 2019.
For the year ended December 31, 2018, the Company’s equity method investments consisted of the Diamond Hill Research Opportunities Fund, and the Company’s ownership percentage in this investment was 28% as of December 31, 2018, and thus, that Fund’s income is included in the table below.
The Company’s equity method investments consist of cash, marketable equity securities, and fixed income securities. The following table includes the condensed summary financial information from the Company’s equity method investments as of December 31, 2020 and 2019, and for the years ended December 31, 2020, 2019, and 2018:
1 In October 2020, the Diamond Hill Research Opportunities Fund merged into the Diamond Hill Long-Short Fund.
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|  |  | As of December 31,
|  |  | 2020 |  | 2019
Total assets |  |  | $ | — |  |  | $ | 237,073,628 |
Total liabilities |  |  | — |  |  | 38,453,935 |
Net assets |  |  | — |  |  | 198,619,693 |
DHCM’s portion of net assets |  |  | $ | — |  |  | $ | 61,149,774 |
| For the Year Ended December 31,
| 2020 |  | 2019 |  | 2018
Investment income | $ | 4,246,021 |  |  | $ | 5,346,588 |  |  | $ | 1,154,007 |
Expenses | 1,114,278 |  |  | 1,551,291 |  |  | 978,322 |
Net realized gains (losses) | (1,577,639) |  |  | 6,390,727 |  |  | 1,918,661 |
Net change in unrealized appreciation (depreciation) | 2,289,667 |  |  | 14,805,837 |  |  | (10,229,319) |
Net income (loss) | 3,843,771 |  |  | 24,991,861 |  |  | (8,134,973) |
DHCM’s portion of net income (loss) | $ | 1,807,279 |  |  | $ | 8,301,571 |  |  | $ | (2,400,467) |

Note 4 Fair Value Measurements
The Company determines the fair value of our cash equivalents and certain investments using the following broad levels listed below:
Level 1 - Unadjusted quoted prices for identical instruments in active markets.
Level 2 - Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-driven valuations in which all significant inputs are observable.
Level 3 - Valuations derived from techniques in which significant inputs are unobservable. We do not value any investments using Level 3 inputs.
These levels are not necessarily an indication of the risk or liquidity associated with investments.
The following table summarizes investments that are recognized in our consolidated balance sheet using fair value measurements (excludes investments classified as equity method investments) determined based upon the differing levels as of December 31, 2020 and 2019:

December 31, 2020 | Level 1 | Level 2 | Level 3 | Total
Cash equivalents | $ | 94,698,816 |  | $ | — |  | $ | — |  | $ | 94,698,816 |
Fair value investments |  |  |  |
Securities held in Consolidated Funds(a) | 17,641,668 |  | 15,591,639 |  | — |  | 33,233,307 |
Company-sponsored investments | 95,167,829 |  | — |  | — |  | 95,167,829 |
December 31, 2019 |  |  |  |
Cash equivalents | 90,144,943 |  | — |  | — |  | 90,144,943 |
Fair value investments |  |  |  |
Securities held in Consolidated Funds(a) | 19,238,197 |  | 17,010,163 |  | — |  | 36,248,360 |
Company-sponsored investments | $ | 42,039,044 |  | $ | — |  | $ | — |  | $ | 42,039,044 |

(a) Of the securities held in the Consolidated Funds as of December 31, 2020, the Company directly held $23.6 million and non-controlling shareholders held $9.6 million. Of the securities held in the Consolidated Funds as of December 31, 2019, the Company directly held $21.1 million and non-controlling shareholders held $15.1 million.
The Company determines transfers between fair value hierarchy levels at the end of the reporting period. There were no transfers in or out of the levels during any of the years ended December 31, 2020, 2019, and 2018.
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Changes to fair values of the investments are recorded in the Company’s consolidated statements of income as investment income (loss), net.
Note 5 Line of Credit
The Company has a committed Line of Credit Agreement (the "Credit Agreement") with a commercial bank that matures on December 24, 2021, which permits the Company to borrow up to $25.0 million. Borrowings under the Credit Agreement bear interest at a rate equal to LIBOR plus 1.00%. The Company pays a commitment fee on the unused portion of the facility, accruing at a rate per annum of 0.10%.
The Company did not borrow under the Credit Agreement as of and for the period ended December 31, 2020.
The proceeds of the Credit Agreement may be used by the Company and its subsidiaries for ongoing working capital needs, to seed new and existing investment strategies, and for other general corporate purposes. The Credit Agreement contains customary representations, warranties, and covenants.
Note 6 Capital Stock
Common Shares
The Company has only one class of securities outstanding, common shares, no par value per share.
Authorization of Preferred Shares
The Company’s Amended and Restated Articles of Incorporation authorize the issuance of 1,000,000 “blank check” preferred shares with such designations, rights, and preferences as may be determined from time to time by the Company’s board of directors. The Company’s board of directors is authorized, without shareholder approval, to issue preferred shares with dividend, liquidation, conversion, voting, or other rights, which could adversely affect the voting or other rights of the holders of the common shares. There were no preferred shares issued or outstanding as of December 31, 2020 or 2019.
Note 7 Compensation Plans
Equity Incentive Plan
The Company’s equity and incentive plan (the “Plan”) is intended to facilitate the Company’s ability to attract and retain staff, provide additional incentive to employees and directors, and promote the success of the Company’s business. The Plan authorizes the issuance of 600,000 common shares of the Company in various forms of equity awards. The Plan also authorizes cash incentive awards. As of December 31, 2020, there were 222,657 common shares available for awards under the Plan. The Plan provides that the Company’s board of directors, or a committee appointed by the Board, may grant awards and otherwise administer the Plan.
Share-Based Payment Transactions
The Company has issued restricted stock awards under the Plan. Restricted stock awards issued under the Plan, which vest over time, are recorded as deferred compensation in the equity section of the balance sheet on the grant date and then recognized as compensation expense based on the grant date price over the vesting period of the respective grant. Restricted stock grants issued under the Plan are recorded as compensation expense based on the grant date price. The following table represents a roll-forward of outstanding restricted stock and related activity during the year ended December 31, 2020:
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| Shares |  | Weighted-Average Grant Date Price per Share
Outstanding Restricted Stock as of December 31, 2019 | 227,844 |  |  | $ | 175.49 |
Grants issued | 22,099 |  |  | 115.32 |
Grants vested | (50,600) |  |  | 160.79 |
Grants forfeited | (15,625) |  |  | 185.90 |
Outstanding Restricted Stock as of December 31, 2020 | 183,718 |  |  | $ | 173.80 |

The weighted-average grant date price per share of Restricted Stock issued during the years ended December 31, 2019 and 2018 was $146.59 and $195.00, respectively. The total fair value of Restricted Stock vested, as of their respective vesting dates, during the years ended December 31, 2020, 2019, and 2018 was $5.2 million, $3.3 million, and $5.8 million, respectively.
Total deferred equity compensation related to unvested Restricted Stock grants was $14.7 million as of December 31, 2020. Compensation expense related to restricted stock is calculated based upon the fair market value of the common shares on the applicable grant date. The Company’s policy is to adjust compensation expense for forfeitures as they occur. The recognition of compensation expense related to deferred compensation over the remaining vesting periods is as follows:

2021 |  | 2022 |  | 2023 |  | 2024 |  | 2025 |  | Thereafter |  | Total
$ | 5,332,145 |  |  | $ | 4,375,573 |  |  | $ | 2,406,727 |  |  | $ | 1,308,272 |  |  | $ | 535,508 |  |  | $ | 789,893 |  |  | $ | 14,748,118 |

Stock Grant Transactions
The following table represents shares issued as part of the Company’s incentive compensation program during the years ended December 31, 2020, 2019, and 2018:

| Shares Issued |  | Grant Date Value
December 31, 2020 | 23,640 |  |  | $ | 3,396,359 |
December 31, 2019 | 24,048 |  |  | 3,655,296 |
December 31, 2018 | 20,153 |  |  | $ | 4,109,197 |

401(k) Plan
The Company sponsors a 401(k) plan in which all employees are eligible to participate. Employees may contribute a portion of their compensation subject to certain limits based on federal tax laws. Effective April 1, 2018, the Company increased its matching contributions of common shares of the Company with a value equal to 250 percent of the first six percent of an employee’s compensation contributed to the plan. Prior to April 1, 2018, the Company made matching contributions of common shares of the Company with a value equal to 200 percent of the first six percent of an employee’s compensation contribution to the plan. Employees become fully vested in the matching contributions after six plan years of employment. The following table summarizes the Company’s expenses attributable to the 401(k) plan during the years ended December 31, 2020, 2019 and 2018:

| Shares Issued |  | Company Contribution
December 31, 2020 | 20,976 |  |  | $ | 2,511,746 |
December 31, 2019 | 17,651 |  |  | 2,496,936 |
December 31, 2018 | 11,967 |  |  | $ | 2,231,735 |

Deferred Compensation Plans
The Company offers two deferred compensation plans: the Diamond Hill Fixed Term Deferred Compensation Plan and the Diamond Hill Variable Term Deferred Compensation Plan (together, the “Deferred Comp Plans”). Under the Deferred Comp Plans, participants may elect to voluntarily defer, for a minimum of five years, certain incentive compensation, which the Company then contributes into the Deferred Comp Plans. Each participant is responsible for designating investment options for assets they contribute, and the distribution paid to each participant reflects any gains or losses on the assets realized in connection with the Plans. Assets held in the Deferred Comp Plans are included in the Company’s investment portfolio, and the associated obligation to participants is included in deferred compensation liability. The gain (loss) on investments in the Deferred Comp Plans are recorded as deferred compensation expense (benefit) and are included in operating income. Deferred compensation expense is offset by an equal amount in investment income below net operating income on the consolidated
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statements of income statement, and thus has no impact on net income attributable to the Company. Deferred compensation liability was $33.2 million and $30.3 million as of December 31, 2020 and 2019, respectively.
Note 8 Operating Leases
The Company currently leases office space of approximately 37,829 square feet at one location.
As of December 31, 2020 and December 31, 2019, the carrying value of the right-of-use asset, which is included in property and equipment, net of depreciation on the consolidated balance sheets, was approximately $2.1 million and $2.5 million, respectively. As of December 31, 2020 and December 31, 2019, the carrying value of the lease liability, which is included in accounts payable and accrued expenses on the consolidated balance sheets, was approximately $2.5 million and $3.1 million, respectively.
The following table summarizes the total lease and the related operating expenses for the years ended December 31, 2020, 2019 and 2018:

For the year ended December 31,
2020 |  | 2019 |  | 2018
$ | 947,398 |  |  | $ | 971,203 |  |  | $ | 970,143 |

Lease expense and the related operating expenses are recorded in general and administrative expenses on the consolidated statements of income.
The approximate future minimum lease payments under the operating lease are as follows:

|  | Future Minimum Lease Payments by Year
Total |  | 2021 |  | 2022 |  | 2023 |  | 2024 |  | 2025 |  | Thereafter
$ | 2,652,760 |  |  | $ | 624,179 |  |  | $ | 624,179 |  |  | $ | 624,179 |  |  | $ | 624,179 |  |  | $ | 156,044 |  |  | $ | — |

In addition to the above lease payments, the Company is also responsible for normal operating expenses of the property. These annual operating expenses were approximately $0.4 million in each of 2020, 2019, and 2018.
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Note 9 Income Taxes
The provision for income taxes consists of:

| As of December 31,
| 2020 |  | 2019 |  | 2018
Current federal income tax provision | $ | 9,633,927 |  |  | $ | 13,952,230 |  |  | $ | 15,731,258 |
Current state and local income tax provision | 2,374,534 |  |  | 3,656,997 |  |  | 8,560,479 |
Deferred income tax expense (benefit) | 1,949,407 |  |  | 1,079,247 |  |  | (5,622,396) |
Provision for income taxes | $ | 13,957,868 |  |  | $ | 18,688,474 |  |  | $ | 18,669,341 |

A reconciliation of income tax expense at the statutory federal rate to the Company’s income tax expense is as follows:

| 2020 |  | 2019 |  | 2018
Income tax computed at statutory rate | $ | 10,945,831 |  |  | $ | 16,472,987 |  |  | $ | 13,646,583 |
Expense (benefit) attributable to redeemable noncontrolling interests(a) | 104,035 |  |  | (1,007,012) |  |  | 222,624 |
State and local income taxes, net of federal benefit | 1,875,882 |  |  | 2,835,215 |  |  | 2,993,730 |
Internal revenue code section 162 limitations | 632,705 |  |  | 625,009 |  |  | 400,060 |
Change in uncertain state and local tax positions, net of federal benefit | — |  |  | (47,197) |  |  | 2,982,337 |
Revaluation adjustment of net deferred tax assets(b) | — |  |  | — |  |  | (917,288) |
Excess tax deficit (benefit) on vesting of restricted stock | 612,930 |  |  | (70,878) |  |  | (667,697) |
Income tax benefit from dividends paid on restricted stock | (455,283) |  |  | (431,192) |  |  | (340,200) |
Interest and penalties | 1,460 |  |  | 101,010 |  |  | 786,711 |
Other | 240,308 |  |  | 210,532 |  |  | (437,519) |
Income tax expense | $ | 13,957,868 |  |  | $ | 18,688,474 |  |  | $ | 18,669,341 |

(a) The provision for income taxes includes expense (benefit) attributable to the fact that the Company’s operations include the Consolidated Funds, which are not subject to federal income taxes. Accordingly, a portion of the Company’s earnings are not subject to corporate tax levels.
(b) The provision for income taxes for 2018 includes the remeasurement of our net deferred tax assets of $0.9 million due to additional state and local tax that the Company expects to pay in future tax periods.
Deferred income taxes and benefits arise from temporary differences between taxable income for financial statement and income tax return purposes. Net deferred tax assets consisted of the following as of December 31, 2020 and 2019:

| 2020 |  | 2019
Stock-based compensation | $ | 3,500,026 |  |  | $ | 4,571,430 |
Accrued compensation | 9,026,113 |  |  | 8,496,929 |
Unrealized gains | (3,145,177) |  |  | (2,150,699) |
Property and equipment | (963,610) |  |  | (553,265) |
Other assets and liabilities | 20,094 |  |  | 22,458 |
Net deferred tax assets | $ | 8,437,446 |  |  | $ | 10,386,853 |

The net temporary differences incurred to date will reverse in future periods as the Company generates taxable earnings. The Company believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets recorded. The Company records a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of December 31, 2020, no valuation allowance was deemed necessary.
FASB ASC 740, Income Taxes, prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company recognizes tax benefits related to positions taken, or expected to be taken, on its tax returns, only if the positions are "more-likely-than-not" sustainable. Once this threshold has been met, the Company’s measurement of its expected tax benefits is recognized in its financial statements.
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The Company and its subsidiaries file income tax returns with the Internal Revenue Service and the taxing authorities of various states. Generally, the Company is subject to federal, state, and local examinations by tax authorities for the tax years ended December 31, 2016 through 2020. During 2020, the Company closed an examination by the California Franchise Tax Board for the Company’s 2015 and 2016 tax years. During 2019, the Company closed an examination with the New York State Department of Finance and Taxation for tax years 2014 through 2016. During 2018, the Company reassessed its New York City filing positions and filed a Voluntary Disclosure Agreement with the New York City Department of Finance.
The amount of uncertain tax positions as of December 31, 2020, 2019, and 2018, respectively, which would impact the Company’s effective tax rate if recognized and a reconciliation of the beginning and ending amounts of uncertain tax positions is as follows:

| 2020 |  | 2019 |  | 2018
Uncertain tax positions, beginning of the year | $ | — |  |  | $ | 2,982,337 |  |  | $ | — |
Gross addition for tax positions of the current year | — |  |  | — |  |  | — |
Gross additions for tax positions of prior years | — |  |  | — |  |  | 2,982,337 |
Reductions of tax positions of prior years for: |  |  |  |  |
Lapses of applicable statutes of limitations | — |  |  | — |  |  | — |
Settlements during the period | — |  |  | (2,935,140) |  |  | — |
Changes in judgment/excess reserve | — |  |  | (47,197) |  |  | — |
Uncertain tax positions, end of year | $ | — |  |  | $ | — |  |  | $ | 2,982,337 |

In addition to the above uncertain tax positions, the Company recognized $0.1 million and $0.8 million of interest and penalties in the years ended December 31, 2019 and 2018, respectively. No interest and penalties for uncertain tax positions were recognized in the year ended December 31, 2020.
Note 10 Earnings Per Share
The Company’s common shares outstanding consist of all shares issued and outstanding, including unvested restricted shares. Basic and diluted EPS are calculated under the two-class method. Restricted stock units are considered dilutive. The following table sets forth the computation for basic and diluted EPS and reconciliation between basic and diluted shares outstanding:

| Year Ended December 31,
| 2020 |  | 2019 |  | 2018
Net Income | $ | 38,165,138 |  |  | $ | 59,754,319 |  |  | $ | 46,314,388 |
Less: Net loss (income) attributable to redeemable noncontrolling interest | 495,407 |  |  | (4,795,295) |  |  | 1,061,441 |
Net income attributable to common shareholders | $ | 38,660,545 |  |  | $ | 54,959,024 |  |  | $ | 47,375,829 |
Weighted average number of outstanding shares | 3,214,564 |  |  | 3,436,574 |  |  | 3,512,470 |
Dilutive impact of restricted stock units | — |  |  | 67 |  |  | 2,058 |
Weighted average number of outstanding shares - Diluted | 3,214,564 |  |  | 3,436,641 |  |  | 3,514,528 |
Earnings per share attributable to common shareholders |  |  |  |  |
Basic | $ | 12.03 |  |  | $ | 15.99 |  |  | $ | 13.49 |
Diluted | $ | 12.03 |  |  | $ | 15.99 |  |  | $ | 13.48 |

Note 11 Commitments and Contingencies
The Company indemnifies its directors, officers and certain employees for certain liabilities that may arise from performance of their duties to the Company. From time to time, the Company is involved in legal matters relating to claims arising in the ordinary course of business. There are currently no such matters pending that the Company believes could have a material adverse effect on its consolidated financial statements.
Additionally, in the normal course of business, the Company enters into agreements that contain a variety of representations and
warranties and that provide general indemnification obligations. Certain agreements do not contain any limits on the Company’s liability and could involve future claims that may be made against the Company that have not yet occurred.
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Therefore, it is not possible to estimate the Company’s potential liability under these indemnities. Further, the Company maintains insurance policies that may provide coverage against certain of these liabilities.
Note 12 Subsequent Events
Asset Purchase Agreement
DHCM entered into an asset purchase agreement dated February 2, 2021 (the “Agreement”) with Brandywine Global Investment Management, LLC (“Brandywine Global”), a specialist investment manager of Franklin Resources, Inc., pursuant to which Brandywine Global will acquire the businesses of Diamond Hill’s two high yield-focused mutual funds - the Corporate Credit Fund and the High Yield Fund (the “Acquired Funds”).
In connection with the transaction, two of the Company’s portfolio managers and a research analyst will join Brandywine Global’s fixed income team.
Pursuant to the Agreement, DHCM will receive an initial cash payment at closing of up to $9.0 million based upon the closing date net revenue of the Acquired Funds, and may receive two additional payments of up to $13.0 million in the aggregate based on the net revenue of the Acquired Funds on the one-year anniversary of the closing date. There can be no assurance that all or any of these additional payment amounts will be received by DHCM.
The Agreement contains customary representations, warranties and covenants and is subject to customary closing conditions, including a minimum net revenue requirement as of the closing date and approval by the shareholders of the Acquired Funds. The sale is expected to close in the second quarter of 2021, subject to approval of each of the Acquired Fund’s shareholders.
Dividends
On February 25, 2021, the Company’s board of directors approved a quarterly cash dividend of $1.00 per share, payable
on March 19, 2021, to shareholders of record as of March 11, 2021.

ITEM 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

None.

ITEM 9A. | Controls and Procedures

Management, including the Chief Executive Officer and the Chief Financial Officer, has conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K (the “Evaluation Date”). Based on such evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to ensure that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
There have been no changes in the Company’s internal control over financial reporting during the year ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Annual Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of its consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020 based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2020.
The Company’s independent registered public accounting firm, KPMG LLP, has audited the Company’s 2020 and 2019 consolidated financial statements included in this Annual Report on Form 10-K and the Company’s internal control over financial reporting as of December 31, 2020, and has issued its Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements, which is included in this Annual Report on Form 10-K.

ITEM 9B. | Other Information

None.
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PART III

ITEM 10. | Directors, Executive Officers and Corporate Governance

Information required by this Item 10 is incorporated herein by reference from the Company’s definitive proxy statement for its 2021 annual meeting of shareholders, which will be filed with the SEC no later than 120 days after December 31, 2020, pursuant to Regulation 14A of the Exchange Act (the “2021 Proxy Statement”), under the captions: “Delinquent Section 16(a) Reports”, “Proposal 1 - Election of Directors”, “Proposal 1 - Election of Directors - The Board of Directors and Committees”, “Proposal 1 - Election of Directors - Corporate Governance”, and “Proposal 1 - Election of Directors - Executive Officers and Compensation Information”.

ITEM 11. | Executive Compensation

Information required by this Item 11 is incorporated herein by reference from the 2021 Proxy Statement under the captions: “Proposal 1 – Election of Directors—The Board of Directors and Committees”, “Proposal 1 – Election of Directors – Corporate Governance”, “Proposal 1 – Election of Directors – Executive Officers and Compensation Information”, and “Proposal 1 – Election of Directors – Executive Officers and Compensation Information - Compensation Committee Report”.

ITEM 12. | Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

The following table sets forth certain information concerning our equity compensation plans at December 31, 2020:
Equity Compensation Plan Information

| (a) |  | (b) |  | (c) |
Plan category | Number of securities to be issued upon the exercise of outstanding options, warrants and rights |  | Weighted-average exercise price of outstanding options, warrants and rights |  | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) |
Equity compensation plans approved by security holders | — |  |  | $ | — |  |  | 222,657 |  | 1

1 | This amount relates to common shares that may be issued under our 2014 Equity and Cash Incentive Plan.

The other information required by this Item 12 is incorporated herein by reference from the 2021 Proxy Statement under the captions: “Security Ownership of Certain Beneficial Owners and Management” and “Proposal 1 – Election of Directors – Executive Officers and Compensation Information.”

ITEM 13. | Certain Relationships and Related Transactions, and Director Independence

Information required by this Item 13 is incorporated herein by reference from the 2021 Proxy Statement under the caption: “Proposal 1 – Election of Directors – Director Independence” and “Proposal 1 – Election of Directors – Corporate Governance”.

ITEM 14. | Principal Accounting Fees and Services

Information required by this Item 14 is incorporated herein by reference from the 2021 Proxy Statement under the caption: “Proposal 2 – Ratification of the Appointment of Independent Registered Public Accounting Firm”.
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PART IV

ITEM 15. | Exhibits, Financial Statement Schedules

(a) (1) | Financial Statements: See “Part II. Item 8, Financial Statements and Supplementary Data”.
(2) | Financial Statement Schedules: All financial statement schedules for which provision is made in the applicable accounting regulations of the SEC are omitted because they are not required or the required information is included in the accompanying financial statements or notes thereto.
(3) | Exhibits:

3.1 | Amended and Restated Articles of Incorporation of the Company. (Incorporated by reference from Exhibit 3(i) to the Current Report on Form 8-K filed with the SEC on May 7, 2002; File No. 000-24498.)
3.2 | Certificate of Amendment by Shareholders to the Articles of Incorporation of the Company (Incorporated by reference from Form 8-K Current Report for the event on April 28, 2017; File No. 000-24498.)
3.3 | Amended and Restated Code of Regulations of the Company (Incorporated by reference from Form 8-K Current Report, Exhibit 3.2, filed with the SEC on April 28, 2017; File No. 000-24498.)
4.1 | Description of the company’s Capital Stock (Incorporated by reference from Exhibit 4.1 to the Annual Report on Form 10-K filed on February 27, 2020; file No. 000-24498)
10.1 | Amended and Restated Investment Management Agreement between Diamond Hill Capital Management, Inc. and the Diamond Hill Funds dated November 17, 2011, as amended November 21, 2013. (Incorporated by reference from Exhibit 28(d)(xi) to Form N-1A filed by Diamond Hill Funds as a 485BPOS on October 10, 2017; File Nos. 333-22075 and 811-08061)
10.2 | Amended and Restated Administrative and Transfer Agency Services Agreement dated as of May 31, 2002, as amended January 1, 2016, between Diamond Hill Capital Management, Inc. and the Diamond Hill Funds. (Incorporated by reference from Exhibit 28(h)(vii) to Form N-1A filed by Diamond Hill Funds as a 485BPOS on October 10, 2017; File Nos. 333-22075 and 811-08061)
10.3* | 2014 Equity and Cash Incentive Plan. (Incorporated by reference from Exhibit 10.1 to the Registration Statement on Form S-8 filed with the SEC on June 27, 2014; File No 333-197064.)
10.4* | 2014 Equity and Cash Incentive Plan As of Agreement. (Incorporated by reference from Exhibit 10.4 to the Annual Report on Form 10-K filed with the SEC on February 21, 2019; File No. 000-24498.)
10.5* | Diamond Hill Investment Group, Inc. Compensation Recoupment and Restitution Policy. (Incorporated by reference from Exhibit 10.1 to the Quarterly Report on Form 10-Q filed with the SEC on April 27, 2020; File No. 000-24498.)
10.6* | Diamond Hill Investment Group, Inc. Compensation Recoupment and Restitution Policy Acknowledgment and Agreement. (Incorporated by reference from Exhibit 99.1 to the Current Report on Form 8-K filed with the SEC on February 20, 2013; File No. 000-24498.)
10.7* | Diamond Hill Fixed Term Deferred Compensation Plan. (Incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on April 30, 2013; File No. 000-24498.)
10.8* | Diamond Hill Variable Term Deferred Compensation Plan. (Incorporated by reference from Exhibit 10.2 to the Current Report on Form 8-K filed with the SEC on April 30, 2013; File No. 000-24498.)
10.9* | First Amendment to the Diamond Hill Fixed Term Deferred Compensation Plan. (Incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on May 28, 2013; File No. 000-24498.)
10.10* | First Amendment to the Diamond Hill Variable Term Deferred Compensation Plan. (Incorporated by reference from Exhibit 10.2 to the Current Report on Form 8-K filed with the SEC on May 28, 2013; File No. 000-24498.)
10.11* | Employment Agreement between Heather E. Brilliant and Diamond Hill Capital Management, Inc., dated July 5, 2019 (Incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K, filed with the SEC on July 10, 2019; File No. 000-24498).
10.12* | Diamond Hill Investment Group, Inc. Employee Stock Purchase Plan (Incorporated by reference from Exhibit 10.3 to the Quarterly Report on Form 10-Q filed with the SEC on October 27, 2020; File No. 000-24498.)

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14.1 | Amended Code of Business Conduct and Ethics. (Incorporated by reference from Exhibit 14.1 to the Annual Report on Form 10-K filed with the SEC on February 27, 2020; File No. 000-24498.)
21.1 | Subsidiaries of the Company. (Filed herewith)
23.1 | Consent of Independent Registered Public Accounting Firm, KPMG LLP. (Filed herewith)
31.1 | Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a). (Filed herewith)
31.2 | Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a). (Filed herewith)
32.1 | Section 1350 Certifications. (Furnished herewith)
101.ins | XBRL Instance Document.
101.sch | XBRL Taxonomy Extension Schema Document.
101.cal | XBRL Taxonomy Extension Calculation Linkbase Document.
101.def | XBRL Taxonomy Extension Definition Linkbase Document.
101.lab | XBRL Taxonomy Extension Label Linkbase Document.
101.pre | XBRL Taxonomy Extension Presentation Linkbase Document.

* | Denotes management contract or compensatory plan or arrangement.
(b) | Exhibits: Reference is made to Item 15(a)(3) above.
(c) | Financial Statement Schedules: None required.

ITEM 16. | Form 10-K Summary

None.
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Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized:

DIAMOND HILL INVESTMENT GROUP, INC. |
By: |  | /s/ Heather E. Brilliant |
|  | Heather E. Brilliant, Chief Executive Officer | February 25, 2021

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature |  | Title |  | Date
/s/ Heather E. Brilliant |  | Chief Executive Officer and |  | February 25, 2021
Heather E. Brilliant |  | President |  |
/s/ Thomas E. Line |  | Chief Financial Officer and |  | February 25, 2021
Thomas E. Line |  | Treasurer |  |
/s/ Jeffrey J. Cook |  | Controller |  | February 25, 2021
Jeffrey J. Cook |  |  |  |
Richard S. Cooley* |  | Director |  | February 25, 2021
Richard S. Cooley |  |  |  |
Randolph J. Fortener* |  | Director |  | February 25, 2021
Randolph J. Fortener |  |  |  |
James F. Laird* |  | Director |  | February 25, 2021
James F. Laird |  |  |  |
Paula R. Meyer* |  | Director |  | February 25, 2021
Paula R. Meyer |  |  |  |
Bradley C. Shoup* |  | Director |  | February 25, 2021
Bradley C. Shoup |  |  |  |
Nicole R. St. Pierre* |  | Director |  | February 25, 2021
Nicole R. St. Pierre |  |  |  |

* By | /s/ Thomas E. Line
| Thomas E. Line
| Executed by Thomas E. Line
| on behalf of those indicated pursuant to Powers of Attorney

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