At Diamond Hill, we take a holistic view of sustainability and strive to be transparent in communicating to clients and shareholders how we approach these issues in the administration of our business and in the management of our portfolios.
Sustainability in the Management of our Business
We define sustainability as ensuring the long-term viability of the firm by managing our business to help our clients meet their financial goals without impeding the ability of future generations to meet their economic, social, and environmental needs. We believe maintaining a long-term perspective while considering the implications of how our business decisions could affect relevant stakeholders will ensure we can continue to add value for shareholders over time. We also believe we should demonstrate a commitment to the same principles we expect of the companies in which we invest, which include a long-term perspective, sustainable competitive advantages, and stakeholder-focused management teams.
Diamond Hill's sustainability efforts at the firm level encompass four areas:
- The Diamond Hill Investment Group, Inc. Board of Directors (the "Board") represents the interests of Company shareholders and has responsibility to other relevant stakeholders. The Board's purpose is to ensure the Company is fulfilling its fiduciary duty and it regularly interacts with management to ensure that the firm is being managed with a long-term perspective in mind. Six of seven members of the Diamond Hill Investment Group board of directors are independent.
- The Diamond Hill Funds Board of Trustees represents the interests of Fund shareholders and provides oversight of the management of the Funds. All members of the Diamond Hill Funds Board of Trustees are independent.
- All independent directors of Diamond Hill Investment Group, Inc. and trustees of the Diamond Hill Funds have deep industry experience, which we believe helps ensure strong oversight of our operations.
- The objective of our Compliance Program is to protect the interests of our clients, while also preventing violation of federal securities laws. We also strive to eliminate or mitigate potential conflicts of interest. At Diamond Hill, all employees are responsible for compliance and we pride ourselves on maintaining a strong commitment to compliance throughout the firm.
- Our Information Security Program is designed to protect the privacy and personal information of clients, shareholders, and employees, as well as secure the overall network and operating infrastructure to ensure that Diamond Hill can continue to operate seamlessly without material disruption.
- Our Code of Ethics prohibits the purchase of any individual securities or competing firms' funds in segments of the market in which Diamond Hill has an investment strategy. As such, the majority of our employees' personal investments are in the same portfolios in which our clients invest. This policy significantly reduces potential conflicts related to personal security trading.
We believe our corporate governance practices contribute to the long-term viability of the firm by reducing firm-level risk and promoting a culture of compliance among associates.
- Diamond Hill has a long history of supporting local charitable causes. The Diamond Hill Charitable Foundation currently supports several community organizations focused on a variety of issues, including poverty, education, and children's needs.
- We match employee charitable contributions up to $2,000 per year to further support the organizations that mean the most to our employees.
- We evaluate our impact in the community and optimize our contributions to those groups we believe will have the most tangible impact.
- The firm maintains an Equal Opportunity Employment Policy, which is designed to prevent discrimination when making hiring decisions.
We believe that having a positive impact in our community and helping our associates support the causes that are most important to them will help us maintain and improve upon our position as a good corporate neighbor.
- We believe that cognitive diversity, which we define as having a variety of viewpoints, perspectives, and ways of processing information, is beneficial for organizational decision making, problem solving, and team building, and is one of the primary goals of our diversity and inclusion efforts.
- We actively seek diversity at Diamond Hill by recruiting women and other underrepresented groups for positions throughout the firm. Our efforts have been largely focused on women, and we work with several women's organizations to not only identify candidates for potential positions at Diamond Hill, but also to generate interest in our industry. Women make up half the world's population but are underrepresented in the asset management industry and we believe increasing the amount of women in asset management will benefit all industry participants.
- When making new job postings available, we believe it is important to publicly post open positions before they are filled, and we insist on a diverse candidate slate for every position before we fill it.
- We also believe that having diversity in the groups responsible for the oversight of our operations is important. Three out of seven Diamond Hill Investment Group, Inc. Board members are women, and four of six Trustees for the Diamond Hill Funds are women.
We believe increasing diversity at Diamond Hill and considering diverse candidates for open positions at the firm will enable us to make better decisions and operate more effectively over the long term.
- We want to encourage ownership in decisions affecting the future of the company. We make an active effort to include a wide range of employees in discussions concerning the strategic direction of the firm, and we seek to leverage the intellectual capital of our associates by incorporating employee ideas and suggestions into our overall plans where possible.
- We regularly participate in employee engagement surveys to determine how effective senior leadership is at articulating and communicating their vision for the firm, with the goals of continuously improving our strategy and how we communicate with employees, and maintaining a culture of shared responsibility throughout the organization.
- We also have several internal groups focused on improving employee engagement and satisfaction. The Wellness Team is designed to promote increased awareness of healthy behaviors and well-being, provide opportunities for associate interaction and camaraderie, and enhance employee morale. The Appreciation Task Force is focused on improving our efforts at valuing employee contributions by recognizing both individual and collective accomplishments at Diamond Hill.
- We believe that in order to attract and retain high-quality associates, we must be transparent about our compensation practices. We are committed to providing our employees with fair and competitive compensation with a significant long-term equity component, which means every employee at Diamond Hill is an owner. We believe this helps associates think broadly about our business and maintain a long-term focus.
We believe attracting and retaining an engaged, high-quality workforce will enable us to continue to add value for clients and shareholders over the long term.
Sustainability in Portfolio Management
We define sustainability as ensuring the long-term viability of the companies in which we invest by evaluating all material risks and opportunities associated with those businesses, and incorporating such conclusions into our intrinsic value estimates where relevant. We believe being a good corporate steward is good for the long-term valuation of a company. We also believe companies that maintain a long-term perspective and consider the implications of how business decisions could affect relevant stakeholders in the future are best positioned to add value for shareholders over time.
There is currently a lack of clear terminology in the industry regarding the incorporation of sustainability factors into investment processes. We want to be transparent about how we think about these issues and how they are incorporated into our investment process.
Sustainable investing can be implemented in client portfolios using two common approaches:
Investors who engage in integration-based investing want to ensure the long-term viability of their investments. They typically have longer-term time horizons and want to know that all material risks are being considered in the management of that investment.
We understand that investors with multi-generational time horizons are becoming increasingly concerned with the long-term viability of their investments. We believe that in order to fulfill our fiduciary responsibility and maximize the long-term value of our clients' assets, we must consider all information that may impact the value of those assets. As such, Diamond Hill incorporates sustainability issues into our investment analysis and decision-making process when we believe such issues have the potential to impact the long-term value of the companies in which we invest.
Investors who engage in values-based investing do not want their investments to be in violation of their morals or beliefs. They typically restrict the investment universe by prohibiting investment in certain companies or industries engaged in practices that run counter to their values.
We understand there are multiple shades of interpretation regarding sustainability issues and that individual investors have different morals and belief systems. We don't want to assume value judgements on behalf of our clients. As such, when we have separate account clients who want their investments to reflect their values, we work with them to understand their concerns and create customized portfolios that restrict or prohibit investment in certain companies or industries.
When considering sustainability issues in the management of our portfolios, we focus on three key areas:
Maintaining a Long-Term Perspective – Many sustainability issues, especially those of an environmental nature, will manifest over time, making our long-term investment perspective well-suited for incorporating them into our analysis. Our investment horizon is five years or longer, and we construct portfolios using a fundamental, bottom-up process and rolling five-year forecasts. We believe this long-term perspective enables us to more accurately integrate potential sustainability issues into our investment analysis. Additionally, since our research analysts are industry specialists who spend the majority of their time thoroughly understanding the dynamics of their respective industries, we believe they are well-positioned to assess the potential long-term impact of such issues on company fundamentals.
Example: Within the insurance industry, many property and casualty insurance companies rely on data models that could be underestimating the impact of climate change on the frequency and severity of future catastrophic weather events. We believe incorporating such information into our investment process helps us make better investment decisions by providing us with a more complete picture of the long-term prospects for companies within our portfolios.
Understanding Potential Risks – We view risk as the permanent loss of capital, rather than short-term volatility of returns as measured by standard deviation. We believe that the standard deviation of the stock price does not reflect the current and future risks that actually exist, and with the benefit of intensive company analysis, we are able to more accurately determine how such risks could affect our holdings over long periods of time.
Example: One of the key risks we have become more mindful of recently is the issue of data privacy and security. The amount of data and privacy incidents has continued to increase, and, in many cases, such breaches have resulted in material downside for the stock prices of the companies responsible. We want to be mindful of potentially material risks to our investment theses and we believe that our industry-specialist analysts are in the best position to properly evaluate these issues to protect our clients from a permanent loss of capital.
Focusing on Materiality – To forecast the amount and timing of cash flows for a potential investment, we concentrate on the fundamental economic drivers of the business. We have access to a wide variety of information that may aid us in valuing the business, and determining which information is material to our investment thesis is one of our most important responsibilities. If there were a social or environmental issue that we believe would not impact the value of the business in which we are investing, we would not incorporate that information into our investment process.
Example: As long-term investors, we would never make an investment decision without thoroughly evaluating a company's governance structure and its potential impact on our investment. The analysis of issues such as board composition, executive compensation, and dual share class voting structures have been consistently incorporated into our investment process since our firm's inception. A primary consideration when analyzing a company's governance structure is the alignment of management incentives. A poor incentive structure or lack of alignment with shareholders could be enough to disqualify a company for potential investment. Governance practices that we may view negatively, such as dual share classes with differing voting rights, may not rise to the level of materiality needed to impact our estimate of intrinsic value; however, these practices would likely influence our view of the investment's margin of safety. We believe that our team of industry-specialist analysts is well-suited to determining the materiality of company-specific issues and incorporating that information into our estimates of intrinsic value.