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Tuesday, January 05, 2016

Diamond Hill Tweaks Its Fees and Expectations

by: Neil Anderson, Managing Editor

Chris Bingaman and his team just cut fees, both across their mutual funds and for one fund in particular.

On January 1, Columbus, Ohio-based Diamond Hill Capital Management [profile] reduced the administrative service on its mutual funds' class I shares by one basis point, to 20 bps. Also on January 1, Diamond Hill cut the management fee on its giant Diamond Hill Large Cap Fund by five bps to 50 bps, across all share classes of the fund.

Chris Bingaman
Diamond Hill Capital Management
Chief Executive Officer, Portfolio Manager
Susan Stuart, head of communications at the publicly-traded mutual fund company, confirms that the administrative fee cut is the third one in a year for Diamond Hill's I shares, following a three-bps reduction in July 2015 and a one-bps reduction in January 2015. The reduction, she says, "reflects the continued shift in assets from class A to class I" and the "associated economies of scale" Diamond Hill sees thanks to that shift.

As for the four-star, gold-rated Diamond Hill Large Cap Fund, at $3.4 billion it is the firm's second largest mutual fund, Stuart says. And the strategy, which had $7.2 billion at the end of November, including both the fund and separate accounts, is Diamond Hill's biggest. Yet the management fee reduction on the fund is a reflection in a change in Diamond Hill's return expectations for the fund.

The Diamond Hill team sets three basic performance goals, measured over rolling five-year periods, for each of its strategies. The first is an absolute return one, that factors in both inflation and "a normal real equity return." The second is an outperformance, net of fees, compared to a passive benchmark. And the third is top quartile performance versus peers.

"We look at management fees relative to our investment goals. We estimate what we think we can add above the benchmark return," Stuart says. "Our management fee represents 25 percent of that."

Stuart explains further in an e-mailed statement:

... [C]lients are best served by a fee that is low enough to allow us to achieve meaningful outperformance relative to a passive alternative; yet at the same time, a fee that is high enough to allow us to build and maintain an investment team capable of achieving such results. The fee should also reflect a fair split of economics between the client and the investment manager.

We are committed to always maintaining proper alignment of our interests with those of our clients. With that in mind, the majority of incentive compensation potential for our portfolio managers is based on quantitative, pre-determined goals for investments results ...


In the case of the Diamond Hill Large Cap Fund, the team shifted the management fee down to 50 bps from 55 bps to align with a new outperformance-versus-the-benchmark goal of 200 bps, compared to the old target of 220 bps.

"This reduction lowers the margin of outperformance necessary to achieve our relative (vs. benchmark) goal, which we believe will also better align it with our top quartile peer group goal," Stuart states. 

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