Last week I looked at playing the eurozone recovery via a new exchange-traded fund (ETF). This week I’m looking at an actively managed investment trust, focusing on the US stockmarket. It’s fair to say that US stocks are fully valued – perhaps even expensive. Yet this fund – which takes a value approach to investing in America – still raised enough interest to list in London last week. It might just be a core holding for anyone looking for mainstream American equity exposure.
It benefits from having a fairly legendary name on the “biscuit tin”: Mario Gabelli. “Super Mario”, as some on Wall Street call him, is a Bronx boy made good. In 1976 he founded what was Gabelli & Co, which now boasts 15 open-end and 11 closed-end US-registered funds, with combined net assets of more than $26bn. Gabelli likes to compare himself to Warren Buffett and value investing pioneer Benjamin Graham. At the core of his approach is “private market value” (PMV).
What makes this value approach different? The best summary I’ve seen comes from a Numis research report: PMV only makes sense when you add a “catalyst”. PMV is what “the manager believes an informed industrial buyer would be willing to pay to acquire an entire company”.
The manager carries out “a rigorous assessment of fundamentals, focusing on the balance sheet, earnings and free cash flow”. The best investments typically feature “differentiated franchises, organic cash flow, balance-sheet opportunities and operational flexibility”.
In short, the PMV is the intrinsic value of a listed business, plus a premium that another informed business might pay to take control. To unlock this value, you need a catalyst. That could be a takeover, a new investor, or simply a restructuring.
Despite this focus on catalysts, Gabelli isn’t a classic “shareholder activist” – you’re unlikely to see him writing waspish public letters to chief executives, like Third Point’s Daniel Loeb. But there is a great deal of prodding and cajoling behind the scenes – you could call it “active value investing”. Gabelli says his firm is the largest filer of 13D forms in America. These are used by investors if they want to register as active shareholders who can engage with company boards.
This correspondence might end up in a legal battle, or simply in “discussions”. The net effect is, hopefully, that the intrinsic value is released by the catalyst, and this active shareholder engagement. Gabelli’s active approach seems to have worked in the past. The Gabelli Asset Fund has delivered a 12.4% annualised return since its inception in 1986, compared to 10.4% for the S&P 500. In the last 15 years, the fund has beaten 91% of its peers in Morningstar’s large-cap blend category.
More importantly, the US fund that is closest in approach to the new UK investment trust also has a great record. From inception in 1977 to the end of last year, the Gabelli All Cap Value Equity Composite returned 15.9% a year net of fees, compared to 11.8% a year for the S&P 500. Over this period, the fund made money in 34 out of 38 years, compared to 31 years for the S&P 500.
Gabelli’s game plan
Past returns are, of course, no guarantee of future returns, so what’s Gabelli’s game plan now? He’s hired a legion of super-smart young analysts and fund managers who share his philosophy. They focus on finding secular or cyclical trends that a McKinsey or Bain Consulting management consultant would be looking out for over the next decade. So, what might these big trends be?
Mario’s son, Marc Gabelli, has suggested that the fund aims to capture a “fifth-wave” of mergers and acquisitions as cash-rich US companies look to buy growth as revenue gains slow down and profit margins peak.
Another key theme is our ageing society and its infrastructure. “When we talk infrastructure, not only are we talking about the obvious things like bridges, but avionics – planes and airports – or railcars that don’t meet today’s safety standards. In the next 20 years you will see more aircraft to replace and expand our ageing fleet. According to Boeing, over the next 20 years, 35,930 new aircraft are needed.”
The new UK fund – the Gabelli Value Plus Trust (LSE: GVP) – hopes to capitalise on these trends with the £100m it raised last week. The management team includes Mario Gabelli (the founder, chairman and CEO of GAMCO Investors), Marc Gabelli, Caesar Bryan and Robert Leininger. The management fee is 1.0% of market cap, with no performance-related element. Dividends are expected to be around 1%-3%, which compares with a current yield for the S&P 500 of 1.94%.
One big positive for me is that the chairman is Andrew Bell, chief executive of Witan IT. He has a great track record of turning around Witan and he’ll be a very active guardian of investors’ assets. Bell has invested £75,000 of his own money in the issue. That’s “more than four years’ after-tax fees, so I feel I am aligned with the other investors who have supported the issue”.
Bell got involved in the fund because he and Gabelli “met and hit it off at the personal level… the market needs active investors who are willing to hold corporate management to their duties towards investors. Encouraging good practice, such as appropriate incentives, equality of treatment, pre-emptive rights etc, and opposing poison pills, excessive stock option incentives and greenmail, seem to me good cultural attributes.”
‘Key man’ risk and other challenges
Bell also likes the value approach – a focus “on fundamentals seems to me a more secure basis for long-term returns than speculating on ratings and market sentiment”. But that takes me back to my initial point – why buy expensive American assets, especially if the exchange-traded funds tracking the market are so cheap and efficient?
Even Bell concedes that “the relative case for investing in US equities as an index is less strong than a few years ago”. But this is “why an idiosyncratic and selective approach looking for value makes more sense than buying an index fund”.
This approach, of course, comes with its own challenges. One is ‘key man’ risk. As Bloomberg BusinessWeek notes, “the firm is completely based on… the cult of personality of Mario Gabelli”. Another challenge might be Gabelli’s pay packet. His 2012 compensation (the most recent full year disclosed) totalled $69m, says Bloomberg. Buffett’s 2012 pay package was $423,923 – a $100,000 salary and $323,923 in costs, such as personal security.
Also £100m, while an achievement in terms of fund raising, isn’t a huge sum for a new fund – the managers had hoped for more. The competition is not huge – there’s JPMorgan American (£814m market cap), and North American Income (£355m), plus BlackRock North American Income (£94m).
But a more accurate comparison might be with Third Point Offshore, a London-listed hedge fund (which I own), which invests in the hedge-fund supremo Dan Loeb and his team. Loeb is also deep down a value investor looking for catalysts largely in the American markets, although his funds invest across asset classes and geographies, and go long and short. His recent track record is fairly impressive – so I think Gabelli’s more focused fund should be able to do better.