Sunday, May 11, 2008

Frequently Asked Questions

  1. Is a minimum portfolio balance required to open a separate account?

    At Diamond Hill, there is a $5,000,000 minimum balance to qualify for a separate account.

  2. How will a portfolio in a separate account be managed?

    An investor can customize a separate account portfolio around his or her individual investment goals, using the various investment strategies employed by Diamond Hill. Each strategy incorporates the Diamond Hill investment philosophy, which focuses on a company’s “intrinsic value”. An investor’s portfolio is allocated among equity and/or debt securities depending on the strategy chosen by the investor.

    The investor owns the securities directly, unlike a mutual fund where an investor shares ownership of a fund’s holdings with the other shareholders. Changes to the portfolio are made at the manager’s discretion, although consideration can be made of any tax consequences to the investor related to transactions within the separate account portfolio.

  3. How can a separate account be managed for tax efficiency?

    As securities are purchased and sold from a portfolio, the potential for tax consequences arises. In a separate account, securities can be sold in a manner that can minimize the tax consequences for the investor. In addition, specific securities that have sustained net losses can also be sold in order to offset any tax liability on capital gains achieved in an investor’s portfolio.

  4. What are the primary differences between investing in a separate account versus investing in a mutual fund?

    The ability to manage an investment portfolio for the maximum tax efficiency is one of the primary advantages of a separate account that is not necessarily available in a mutual fund. In a mutual fund, securities are typically bought and sold without consideration of the tax situations of the individual shareholders. Plus, redemptions from other fund shareholders can result in tax liabilities if the fund manager has to sell some of the fund’s holdings in order to meet these redemption requests.

    With a separate account, the manager invests only in those securities considered in their determination to be attractive. In contrast, an investment in a mutual fund represents a share of an existing portfolio, with securities that are sufficiently attractive to continue to hold and to purchase with new investment funds.

    5. Shares of securities held within a separate account are not considered as liquid as mutual fund shares. If the investor has a need for a portion of the assets in a separate account, securities will have to be sold on the open market at the best price available. In a mutual fund account, fund shares can be sold at the most recent net asset value price to meet any redemption needs.

  5. What fee does an investor pay for a separate account?

    The investor pays an annual management fee, which is disclosed in the investment advisory agreement signed at the establishment of the account. The fee is based on a percentage of the value of the assets in the investor’s portfolio. The amount paid to the investment manager will fluctuate, but this creates an incentive for the manager to grow the value of the investor’s portfolio. The annual fee is assessed quarterly, and can be conveniently deducted from the investor’s portfolio or withdrawn electronically from a checking, savings, or money market account.

For more information on separate accounts with Diamond Hill, please contact Scott Stapleton at 614-255-3329. If you are interested in a sales kit, you can submit a request online.

Back to Separate Accounts Introduction