Diamond Hill Capital Management

Leadership and strategy change

In September 2019, the firm appointed Heather Brilliant the CEO of Diamond Hill, an external candidate with a background in equity analysis at Morningstar. One of Brilliant’s significant decisions was closing Diamond Hill’s private asset management business, which created turbulence within the firm’s culture. This move led to Ric Dillon, COO Lisa Wesolek, and Jason Job, head of the private asset management business, leaving to found VELA Investment Management—Ric’s third investment firm venture.

Meanwhile, under Brilliant’s leadership, Diamond Hill embarked on a transformative journey. The firm reallocated resources, shifted its sales focus towards marketing, and reorganized its internal teams, moving some sales personnel to the investment team. A new head of marketing was brought in, and Matthew Stadelman was appointed as the full-time CIO to steer the investment strategy. Additionally, Win Murray, formerly the U.S. Director of Research at Harris Associates/Oakmark Funds, joined as Director of Research.

These changes were more than cosmetic. The firm closed smaller equity funds, sold off high-yield strategies, and reorganized its analysts into U.S. and non-U.S. teams. It also redesigned its company logo and website, marking a new chapter in Diamond Hill’s history. The firm reaffirmed its commitment to long-term, traditional value investing while expanding its international focus and growing its fixed-income product offerings.

While some saw these changes as a departure from Ric Dillon’s legacy, others viewed them as necessary adaptations in an industry facing secular headwinds.

Today, as Diamond Hill looks toward the future with new leadership and a refined focus, it remains grounded in the values that have sustained it through two decades of market cycles. The firm’s story, like the market itself, is one of constant evolution—demonstrating that while leadership may change and strategies may shift, the core principles of value investing endure.

Product offerings and research process

Diamond Hill focuses primarily on U.S. value, long-only public equity strategies, offering six distinct strategies: small cap, SMID cap, mid cap, large cap, large cap concentrated, and select. Additionally, the firm provides one equity long/short product. Diamond Hill is also expanding its fixed income and international equity offerings. As of August 2014, the firm managed $33 billion in assets.

At Diamond Hill, analysts play a crucial role in stock coverage. They are expected to stay informed about business developments and maintain current intrinsic value estimates for the companies they monitor. Portfolio managers depend on these estimates for position sizing and buy/sell decisions. When a company undergoes a significant change, analysts must update their assessment and provide a rationale for any adjustments to the intrinsic value estimate. On average, analysts cover around 12 companies, though this number can vary by sector.

Win Murray, the firm’s Director of Research, acknowledges a common challenge in the buy-side industry: top analysts who consistently generate profitable ideas often carry the heaviest workloads. This occurs because they are responsible for monitoring both their sector and the companies they have successfully added to the portfolio. To prevent burnout and foster continued idea generation, Win has mandated that some coverage be transferred to analysts with lighter workloads, allowing star performers to concentrate on generating new investment ideas.

When recommending new ideas, analysts must clearly explain why the market is mispricing a stock and why the investment opportunity exists. For instance, a cyclical company might be overlooked by short-term investors because its stock will only perform when the cycle turns. Alternatively, a turnaround play may require a new CEO to prove themselves before gaining investor confidence.

The best analysts can succinctly distill their thesis into a few pages, highlighting the market’s misunderstanding of the stock. While great companies are always in demand, finding the right entry point is crucial.

Portfolio managers then scrutinize analysts on critical factors such as the durability and predictability of cash flows and the capital allocation decisions of company management. Diamond Hill also considers governance issues, recognizing that while founder-led companies can sometimes be advantageous, they do not always ensure alignment with shareholder interests. Founders may occasionally disregard the concerns of minority investors and act without facing consequences.

Getting a job at Diamond Hill

Diamond Hill’s location in Columbus may not be as attractive to younger talent as major finance hubs like New York City. While Columbus is a sizable city, the lack of a strong geographic connection to the Midwest could potentially impact candidates, particularly for entry-level roles. The firm’s current investment team has heavy representation from two regional schools: Ohio State University (right in Columbus) and Miami University (named after the Miami Tribe).

At the core of Diamond Hill's recruitment process is Win Murray, the firm’s Director of Research. Win plays a crucial role in shaping the research team’s operations, overseeing everything from recruiting new talent to managing underperforming analysts. For entry-level associates, Win is NOT looking for a passion for investing.

While associates are expected to have a solid grasp of accounting and comfort with numbers—aligned with Diamond Hill’s traditional value-investing approach—the firm provides on-the-job modeling training. This includes a structured modeling template that juniors use to present their findings to analysts and portfolio managers.

For experienced hires, expectations are higher, and a stock pitch is required. Candidates must demonstrate a clear understanding of key performance indicators (KPIs) relevant to the business being analyzed. While less-experienced analysts may overwhelm portfolio managers with excessive data, stronger candidates will sift through this information, presenting only the most critical insights for decision-making.

Win is also keen to hire analysts who excel at teaching. Specifically, he values those who can use analogies to explain new situations and demonstrate their prior pattern recognition skills. Win considers this ability an essential trait that distinguishes top analysts.

The rigor and duration of the interview process at Diamond Hill often align with the role's level. Analysts face a high "barrier to exit," so their vetting process is more thorough, as their tenure with the firm is expected to be long-term.

In contrast, interns, who typically stay for about 10 weeks, face a less extensive interview process. Research associates, who generally remain with the firm for 2-3 years, experience a mid-level intensity in their interviews.

According to Win, the firm is in the process of formalizing structured internship and associate programs to provide clearer career paths for junior hires.

Investment team profile

Diamond Hill’s investment team comprises approximately 20 analysts, 3 assistant portfolio managers (PMs), and 10 PMs, all under the leadership of Chief Investment Officer Matthew Stadelman. A notable addition to the team is Win Murray, the former Director of Research for the U.S. team at Harris Associates’ Oakmark Funds, where he worked alongside Bill Nygren for 18 years. Win brings extensive experience, particularly in transitioning from Harris Associates’ generalist model to Diamond Hill’s specialist approach. His insights have been instrumental in shaping the firm’s research structure.

The investment team’s experience is diverse (these numbers represent total counts for each category, and overlap is possible):

• 8 have sell-side equity research experience

• 11 have corporate experience

• 20 members have public equity investing experience from other mutual fund companies. Very few employees have hedge fund backgrounds, as Diamond Hill’s long-term philosophy contrasts with the event-driven, catalyst-based investing style typical of hedge funds. The firm also employs very few former investment bankers.

• CFA designation is highly valued at Diamond Hill: of the 39 investment team members, 35 hold the CFA charter.

• 20 of the investment team members have an MBA with a few members holding masters / doctorate degrees.

Diamond Hill’s specialist model sharply contrasts with the generalist model Win experienced at Harris Associates. At Diamond Hill, analysts are sector specialists, allowing them to develop deep expertise in sectors with unique characteristics, such as oil and gas, financial institutions, semiconductors, and biotechnology. Some analysts have corporate experience or doctorate-level training in these fields.

Win believes that a specialist model provides a better understanding of sectors with specific idiosyncrasies. However, he acknowledges the challenges of transitioning a specialist analyst into PMs who need to size positions and manage risks across sectors.

To address these challenges, Win has “softened” the sector boundaries at Diamond Hill, permitting specialists to pitch ideas outside their primary sectors if they present a compelling case—particularly if the idea is adjacent to their expertise. For instance, a consumer packaged goods (CPG) analyst could pitch stocks outside their sector if it makes sense, which enhances pattern recognition.

In a pure specialist model, PMs are often limited to ideas from a single analyst within a sector, even if that analyst has a poor track record. By allowing specialists to act more like quasi-generalists, Win ensures that PMs are not limited to ideas from the weakest sector specialists.

While the specialist model offers distinct advantages, generalists benefit from a broader range of mental models across sectors, allowing them to apply insights from one industry to another. Generalists are also more adaptable when transitioning into PM roles, having gained experience across various sectors. Moreover, under a generalist model, PMs face less risk of being exposed to the weakest analysts, as underperforming generalists typically do not see their ideas included in the portfolio. However, the main challenge for generalists is the constant need to remain humble and recognize when they lack the deep sector knowledge that specialists possess.

How a buy-side director of research thinks about managing a research team?

Imagine a portfolio of 50 stocks with a 30% annual turnover, meaning that 15 stocks (50 * 30%) will be removed from the portfolio each year. The freed-up capital needs to be redeployed into 15 new stock ideas.

Assuming a portfolio manager (PM) buys only 50% of an analyst’s recommendations, the firm will need to generate 30 new ideas annually. In a typical long-only investment firm, each analyst is expected to produce three high-quality ideas per year. Therefore, each equity strategy would require approximately 10 full-time analysts to sustain the flow of 30 new ideas per year.

The good news is the number of analysts does not have to scale linearly when launching new strategies. For instance, small-cap and SMID cap value strategies can share the same small-cap value ideas. Similarly, long/short strategies can use the same long ideas from the long-only strategies, provided they meet market cap limits.

However, a long/short product requires dedicated analysts for the short book. This is because the short book has higher idea velocity due to their catalyst-driven nature and smaller position sizes, necessitating more new stock ideas than for the long book.

The formula to optimize for sufficient number of high quality new ideas is as follows:

portfolio turnover % * expected productivity per analyst * % of pitched ideas that make it into the portfolio

The key is analyst productivity: Increased productivity from analysts will result in PMs exposed to more ideas, potentially enhancing the portfolio's hit rate. Ultimately, a fund’s success hinges on having highly productive analysts and PMs who can exercise sound judgment in selecting and sizing the right ideas—a task that is often easier in theory than in practice.

Conclusion

Diamond Hill Capital Management's success under Heather Brilliant and Win Murray highlights the importance of research team organization and strategic vision in growing an investment firm despite secular headwinds.

Brilliant's leadership has guided the firm's expansion and rebranding, while Murray’s expertise in refining the research structure and specialist model has contributed to a robust research team and solid track record. It is exciting to see what the future holds for Diamond Hill as a regional long-term investing powerhouse.

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