ITEM 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-looking Statements
Throughout this Form 10-Q, the Company may make forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 relating to such matters as anticipated operating results, prospects for achieving the critical threshold of assets under management, technological developments, economic trends (including interest rates and market volatility), expected transactions and acquisitions and similar matters. The words "believe," "expect," "anticipate," "estimate," "should," "seek," "plan," "intend" and similar expressions identify forward-looking statements that speak only as of the date thereof. While the Company believes that the assumptions underlying its forward-looking statements are reasonable, investors are cautioned that any of the assumptions could prove to be inaccurate and accordingly, the actual results and experiences of the Company could differ materially from the anticipated results or other expectations expressed by the Company in its 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: the adverse effect from a decline in the securities markets; a decline in the performance of the Company's products; changes in interest rates; a general or prolonged downturn in the economy; changes in government policy and regulation, including monetary policy; changes in the Company's ability to attract or retain key employees; unforeseen costs and other effects related to legal proceedings or investigations of governmental and self-regulatory organizations; and other risks identified from time-to-time in the Company's other public documents on file with the SEC.
General
Diamond Hill Investment Group, Inc. (the "Company"), an Ohio corporation organized in 1990, derives its consolidated revenue and net income from investment advisory and fund administration services provided by its subsidiary Diamond Hill Capital Management, Inc. ("DHCM"). DHCM is a registered investment adviser under the Investment Advisers Act of 1940 providing investment advisory services to individuals and institutional investors through the Diamond Hill sponsored mutual funds, separate accounts, and private investment funds (generally known as "hedge funds"). The Company was first incorporated in April 1990. During the first quarter of 2008, the Company incorporated two new subsidiaries, Beacon Hill Fund Services, Inc. ("BHFS") and BHIL Distributors, Inc. ("BHIL") to collectively operate as Beacon Hill. Beacon Hill will provide certain fund administration services and distribution services to small to mid size mutual funds, including Diamond Hill Funds.
In this section, the company discusses and analyzes the consolidated results of operations for the three month periods ending March, 2009 and 2008 and other factors that may affect future financial performance. This discussion should be read in conjunction with the Consolidated Financial Statements, Notes to the Consolidated Financial Statements, and Selected Financial Data. The Company's revenue is derived primarily from investment advisory and administration fees received from Diamond Hill Funds and investment advisory fees received from separate accounts and private investment funds. Investment advisory and administration fees paid to the Company are based primarily on the value of the investment portfolios managed by the Company and fluctuate with changes in the total value of the assets under management. Such fees are recognized in the period that the Company manages these assets. The Company can also earn performance incentive fees which are generally 20% annually on the amount of client investment performance in excess of a certain annual return hurdle. Because performance incentive fees are based primarily on the performance of client accounts, they will be volatile from period to period. The Company's major expense is employee compensation and benefits.

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Table of Contents

Assets Under Management As of March 31, 2009, assets under management ("AUM") totaled $3.9 billion, a 16% decrease in comparison to March 31, 2008. Revenues are highly dependent on both the value and composition of AUM. The following is a summary of the firm's AUM by product and objective as of March 31, 2009 and 2008 and a roll-forward of AUM activity for the three months ended March, 31 2009 and 2008: Assets Under Management by Product As of March 31, (in millions) 2009 2008 % Change Mutual funds $ 2,643 $ 3,152 -16 % Separate accounts 1,063 1,032 3 % Private investment funds 203 481 -58 % Total $ 3,909 $ 4,665 -16 % Assets Under Management by Objective As of March 31, (in millions) 2009 2008 % Change Small and Small-Mid Cap $ 445 $ 566 -21 % Large Cap and Select 1,418 1,036 37 % Long-Short 1,930 2,799 -31 % Strategic and fixed income 116 264 -56 % Total $ 3,909 $ 4,665 -16 % Change in Assets Under Management For the Three Months Ended March 31, (in millions) 2009 2008 AUM at beginning of the period $ 4,510 $ 4,403 Net cash inflows (outflows) mutual funds (138 ) 309 separate accounts 39 74 private investment funds 3 (13 ) (96 ) 370 Net market appreciation (depreciation) and income (505 ) (108 ) Increase (decrease) during the period (601 ) 262 AUM at end of the period $ 3,909 $ 4,665