We recently compiled a list of the Diamond Hill Capital’s Top 10 Stock Picks. In this article, we are going to take a look at where SS&C Technologies Holdings, Inc. (NASDAQ:SSNC) stands against Diamond Hill Capital’s other stock picks.
Heather Brilliant’s Diamond Hill Capital is a Columbus, Ohio-based investment management firm founded in 1997 by Ric Dillon, who managed the company until 2019. Mr. Dillon and several members of his team broke off to form VELA Investment Management that year, which led to the addition of Heather Brilliant to the CEO position at Diamond Hill.
Ms. Brilliant earned an MBA from the University of Chicago Booth School of Business, as well as a degree in economics from Northwestern University. She has since accrued more than two decades of experience in the domestic and international investment markets, including nearly 14 years at Morningstar that culminated in her managing the company’s Australasia division, as well as a successful run as CEO, Americas at First State Investments.
Ms. Brilliant has taken major strides to refocus Diamond Hill in her five years at the helm of the company, closing its private asset management division and several of its investment strategies that didn’t align with the fund’s core value investing ethos. Meanwhile, the fund has bulked up its focus on long-term value and fixed income investing by reworking and growing its teams in those disciplines, and adjusting its operational processes and expectations.
In a November interview on Bloomberg’s The Close, Ms. Brilliant noted that in the current environment of earnings volatility, her team is focused on uncovering high-quality businesses trading at fair valuations. When asked about her team’s approach to investing in broader sectors experiencing secular tailwinds, specifically the utilities sector, Ms. Brilliant said that while the “story” of power-hungry AI is a good one, she was unconvinced by the valuations in the space, noting that she instead likes some of the pricing trends in the insurance space.
That was evidenced by the fund’s large-cap strategy (Q3 investor letter here) adding two big insurance names to its portfolio in Q3, a quarter in which the fund returned 7.84% net of fees, beating the benchmark Russell 1000 Index by 1.76 percentage points. That lifted its year-to-date returns to 14.7% net of fees, ahead of last year’s 13.7% return. The large-cap strategy returned 25.7% in 2021 and 32.2% in 2019.
The Diamond Hill Small Cap Fund (Q3 2024 investor letter here) also added some insurance names to its portfolio during Q3 and rattled off a solid quarter of 8.43% gains, though that trailed the benchmark Russell 2000 Index by 84 basis points. The fund has returned just under 10% annually since inception, beating the Russell 2000 by nearly 200 basis points.
There’s been relatively little volatility in Diamond Hill’s overall sector allocations over the past year, with finance stocks continuing to account for nearly a quarter of the fund’s 13F portfolio, which was valued at $24.7 billion on September 30, up from $23.4 billion at the end of June. Consumer discretionary, healthcare, and industrials stocks were next at 15.9%, 14.1%, and 13.7% exposure respectively. Tech stocks rounded out the fund’s top 5 sectors at 8.6% exposure.
Our Methodology
The following data is gathered from Diamond Hill Capital’s latest 13F filing with the SEC.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here). That’s why you should pay close attention to this important indicator.
Note: All hedge fund data is based on the exclusive group of 900+ active funds tracked by Insider Monkey that filed 13Fs for the Q3 2024 reporting period.
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SS&C Technologies Holdings, Inc. (NASDAQ:SSNC)
Value of Diamond Hill Capital’s 13F Position (9/30/2024): $564 million
Number of Hedge Fund Shareholders (9/30/2024): 58
Hedge funds took renewed interest in SS&C Technologies Holdings, Inc. (NASDAQ:SSNC) during the third quarter, as the number of funds long SSNC jumped by 38%. Joe Milano’s Greenhouse Funds and Dmitry Balyasny’s Balyasny Asset Management were among the many funds to add SSNC to their 13F portfolios during the quarter.
SS&C Technologies Holdings, Inc. (NASDAQ:SSNC), a provider of financial services software, grew organic revenue by 6.4% in Q3, the first time in three years it’s achieved 6% organic growth in consecutive quarters. Adjusted earnings per share also jumped by 10.1% to $1.29 in the latest quarter.
Hedge funds appear to be increasingly bullish on the company’s strong recurring revenue stream (80%), its diversified portfolio of software solutions, and its low leverage, which could allow it to fund further acquisitions. SS&C completed its $670 million acquisition of Battea-Class Action Services at the end of Q3, adding a market-leading provider of settlement recovery services to its portfolio.
Giverny Capital Asset Management sold off SS&C Technologies Holdings, Inc. (NASDAQ:SSNC) late last year primarily due to one major mistake, as the fund reported in its Q4 2023 investor letter:
“It’s a bit like two neighbors, both young and with excellent incomes. If one diligently saves a good portion of their income, dollar cost averages regularly into the stock market, pays a little extra on the mortgage every month and avoids credit card debt, while the other dabbles in exotic investments, is on a first-name basis with a local bookie and maxes out credit cards at the holidays, we have a pretty good idea which household will be richer at age 65, no matter who earns more money over their careers.
It’s the same for companies. Earnings power matters, but not more than capital allocation. I thought about this for a while and sold SS&C Technologies Holdings, Inc. (NASDAQ:SSNC) in the third quarter. This is a fine business with a history of making smart acquisitions. But recently the decision to use floating rate debt to finance acquisitions when interest rates were at historical lows has been a costly mistake. SS&C is growing modestly, but its earnings are stagnant because incremental cash flow must be dedicated to higher interest charges.
Selling SS&C and Markel, which were each about 4% of the portfolio, was not easy for me. Both businesses trade for reasonable prices and have good competitive positions. They have strong CEOs who have been in the job for many years. CEO Bill Stone founded SS&C and is a billionaire thanks to his own decisions. Tom Gayner at Markel is a well-regarded stock market investor and a much-admired leader.”
Overall SSNC ranks 7th on our list of Diamond Hill Capital’s stock picks. While we acknowledge the potential of SSNC as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than SSNC but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
