The first thing to notice when you look at the balance sheet of Columbus-based investment advisor Diamond Hill Investment Group (Nasdaq:DHIL) is that it has an accumulated deficit of $19.8 million. Those new to investing might take a pass as a result - big mistake. On the very next page (income statement) you'll see that it's profitable and doing well. Here's why this 20-year-old company continues to grow.

TUTORIAL: Cash Flow Indicator Ratios

Special Dividends
First, let me explain the mystery of the accumulated deficit. It's not really a mystery but rather a case of special dividends paid to shareholders over the past three years. Dividends paid to shareholders reduce retained earnings - but not always. Diamond Hill made special dividend payments of $87 million between 2008 and 2010, $24.4 million of which was a return of capital and thusly recorded as a debit to common stock rather than retained earnings. This doesn't affect the company's ability to do business, but it will provide investors with an artificially high return on equity in future years.

How It Makes Money
Like most money managers, it generates investment advisory fees for the assets under administration. In 2010, it received $49.2 million in investment advisory fees, an increase of 31% from 2009. Those fees are from several sources, including separately managed accounts of $5 million or more, management fees from its seven open-ended and one closed-ended mutual fund, and private investment funds. The amount of these fees fluctuates from year-to-year with the movement of the markets, as well as its success or failure to gather additional assets. With $9.2 billion in assets under administration, the future is bright.

In addition to investment advisory fees, the company makes approximately 14% of its annual revenues from Beacon Hill Fund Services, which provides mutual fund administration services to its eight funds as well as other third-party mutual fund companies. It's a great way to keep the administration of your funds in-house while making it a viable business. (Although less popular than their open-ended counterparts, these investment vehicles are worth a second look with Open Your Eyes To Closed-End Funds.)

What Sets It Apart?
Many financial advisory firms claim to have a long-term orientation but how many truly walk the talk? Diamond Hill can and does. Here is its mission statement: "Committed to the Graham-Buffett investment philosophy, with goals (over five-year rolling periods) to outperform benchmarks and our peers, and achieve absolute returns sufficient for risk of asset class."

Translation: It could care less about near-term performance; only long-term returns of five years or more matter. If you look at the performance of its three funds in existence since 2001, they've all seriously outperformed their benchmarks while having almost no correlation, which means it isn't a closet indexer like so many funds these days. That's a very good thing.

In the past five years Diamond Hill's earnings per share has ranged between $3.63 and $4.48 with the exception being 2008, when the markets knocked $8.2 million off its operating income due to investment losses from its investment portfolio. However, 2008 wasn't a complete disaster; it brought in $2 billion in new business that year and hasn't had a down year in the past five. That's probably why its stock is up so much over the last 10 years compared to its peers, including Westwood Holdings Group (NYSE:WHG) with an EPS(ttm) of $1.58, Epoch Investment Partners (Nasdaq:EPHC) with an EPS(ttm) of 83 cents, Eaton Vance (NYSE:EV) with an EPS(ttm) of $1.33 and Waddell & Reed (NYSE:WDR) with an EPS(ttm) of $1.83.

The Bottom Line
Diamond Hill's future is bright indeed. It has growing investment advisory fee revenue and has a long-term outlook. Vision of the direction of the company is important in the same way that you need to look beyond short-term bets in your portfolio and (in certain situations) make long-term investment decisions.

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