Diamond Hill's Mid-Cap Strategy Shift and the Implications for Financial Services Exposure

Diamond Hill Investment Group's Mid-Cap Strategy has undergone a notable reallocation in 2024–2025, reflecting a recalibration of its financial services exposure amid a slowing fintech growth environment. This strategic pivot, driven by intrinsic value investing principles and a long-term perspective, underscores the firm's emphasis on portfolio resilience and sector rotation. By shifting focus from high-growth fintech bets to traditional financials, Diamond Hill aims to capitalize on undervalued opportunities while mitigating risks tied to macroeconomic volatility.

A Challenging 2024: Underperformance and Strategic Reassessment

The Diamond Hill Mid Cap Strategy returned 11.39% (gross) and 10.61% (net) in 2024, trailing the Russell Midcap Index's 15.34% return for the year. This underperformance was particularly pronounced in Q4 2024, where the strategy posted a -2.18% (gross) and -2.35% return, contrasting with the index's 0.62% gain. The firm attributed this to relative weakness in consumer discretionary and real estate holdings, but the fintech segment also faced headwinds. For instance, the strategy exited its position in Fidelity National Information Services, Inc. (FIS) in Q3 2025 due to concerns over long-term growth prospects and management execution. Such moves highlight a broader recalibration away from fintech companies struggling with slowing revenue growth and operational challenges.

Sector Rotation: From Fintech to Traditional Financials

Diamond Hill's reallocation strategy has increasingly favored traditional financial services firms over fintechs. As of September 30, 2025, financials constituted 8.6% of the portfolio, with significant allocations to American International Group, Inc. (AIG) and Mr. Cooper Group, Inc. as of September 30, 2025. The firm also increased its stake in Capital One Financial Corp (COF), a fintech player, but simultaneously bolstered positions in established names like Berkshire Hathaway Inc (BRK.B) and Colgate-Palmolive Co (CL). This shift aligns with the firm's intrinsic value philosophy, prioritizing companies with strong balance sheets and predictable cash flows over high-growth, speculative fintechs.

The rationale for this rotation is twofold. First, fintechs faced a funding slowdown in 2024, with global investment dropping to a seven-year low of $95.6 billion. While fintech investment rebounded to $25.9 billion in Q4 2024, optimism remains concentrated in niche areas like regtech and AI. Second, traditional financials have demonstrated resilience amid rising interest rates and economic uncertainty. For example, LPL Financial Holdings Inc. (LPLA), a key holding, saw its shares rise 21.72% over the past 52 weeks, reflecting demand for integrated financial services platforms.

Strategic Reallocation and Portfolio Optimization

Diamond Hill's approach to reallocation emphasizes bottom-up stock-picking, leveraging its research-driven model to identify undervalued opportunities. In Q3 2025, the firm increased its stake in Colgate-Palmolive by 46.74% and Berkshire Hathaway by 12.77%, signaling confidence in traditional financial and consumer staples sectors. Conversely, it reduced or exited positions in fintechs and other underperforming areas, such as Pfizer Inc (PFE) and Lululemon Athletica Inc (LULU). These adjustments reflect a disciplined focus on capital preservation and risk mitigation, particularly in a market where large-cap stocks have outperformed mid-cap peers.

The firm's CEO, Heather Brilliant, highlighted the importance of fixed income strategies in offsetting equity outflows, with fixed income assets reaching $6.2 billion as of December 31, 2024. While this primarily relates to Diamond Hill's broader business, it underscores a thematic alignment with traditional financials-sectors that often benefit from interest rate dynamics and macroeconomic stability.

Implications for Financial Services Exposure

Diamond Hill's reallocation has broader implications for the financial services sector. By favoring traditional financials over fintechs, the firm is betting on the enduring relevance of established institutions in a post-pandemic economy. This aligns with industry trends: traditional banks and insurers are increasingly integrating fintech capabilities to enhance efficiency and customer reach, rather than competing directly with pure-play fintechs. For example, American International Group has leveraged technology to streamline underwriting and claims processing, positioning itself as a hybrid player.

However, the firm's strategy also carries risks. A continued slowdown in fintech innovation could limit upside potential, while overexposure to traditional financials may expose the portfolio to regulatory or interest rate shocks. That said, Diamond Hill's emphasis on intrinsic value and long-term ownership-where each stock is treated as a true ownership interest-suggests a focus on companies with durable competitive advantages.

Conclusion: Balancing Growth and Stability

Diamond Hill's Mid-Cap Strategy shift reflects a pragmatic response to a maturing fintech sector and a volatile macroeconomic environment. By reallocating toward traditional financials, the firm is prioritizing stability and intrinsic value over speculative growth, a strategy that may resonate in a market increasingly favoring quality over momentum. While the underperformance in 2024 highlights the challenges of this approach, the firm's disciplined, research-driven model positions it to capitalize on long-term opportunities in financial services. As fintechs adapt to a post-boom landscape and traditional financials embrace digital transformation, Diamond Hill's balanced approach could serve as a blueprint for navigating sector rotation in an evolving market.