ValueWalk is pleased to present an interview with Dan Miller, Portfolio Manager of the Gabelli Focus Five Fund. Dan was kind enough to respond to our questions about his fund and its concentrated value philosophy.
Can you give us a little information on your background?
I was born on Long Island, but grew up in Lakeland, FL, a small town in the center of the state. In April 2002, when I was a senior at the University of Miami, where I majored in Finance, and the student representative to the Board of Trustees, I was fortunate to be in attendance at a presentation by two of the money managers that handled a portion of the University’s endowment. Donna Shalala, the President of the University, introduced me to Mario Gabelli and told him I was one of her top business students. Two months later, my car was packed and I was on my way to GAMCO’s office in Rye, NY. I initially joined Gabelli & Company, Inc. in the operations department. After demonstrating success working with institutional investors at the firm’s aerospace conference that fall, Mario asked me to build a team of institutional salespeople. This team grew to 10 individuals over the next several years. I became Head of the Institutional Equities business in 2006, President of Gabelli & Company in 2011, and Chairman of Gabelli & Company in 2012. I am also a Managing Director of GAMCO Asset Management, where I am responsible for relationships that approach $500 million in assets.
The fund has an interesting history; can you give readers some color on the topic?
In January 2006, I wanted to draw more attention to the very high quality research ideas that we were generating and we came up with the concept of the Gabelli Focus Five, a quarterly publication of our best ideas. Over the six years we have published this report, our picks are up 210%, while the S&P was down 4.5%. This got a lot of attention from the media, clients, and most importantly, financial advisors. As a result of the significant interest we received in these reports, we decided to take the brand that was established over six years, and the concentrated “best ideas approach” that appeared to work so well, and offer an open-end fund. The easiest option was to repurpose an existing Gabelli Fund, the Woodland Small Cap Value and on January 1, 2012, I became the portfolio manager of the re-named Gabelli Focus Five Fund. To ensure compliance with IRS regulations, we designed the portfolio to be comprised of 25-35 investments, with up to 50% in our five highest conviction ideas.
Why do you favor concentration versus diversification?
According to Morningstar, the average equity fund has 160 positions, and many funds own up to 500 individual investments. In my view, an investor is better off owning a low-cost ETF at that level of diversification. There is strong evidence that demonstrates that portfolios outperform the broader market when a manager is able to invest in fewer but higher conviction ideas. This makes a lot of sense. I’ve learned as an institutional salesman that money managers tend to dabble. They will attend a conference, read a magazine, or watch CNBC, finding ideas that are compelling, or at least interesting enough to take a 10-15 bps position. Then over time, they will follow it, and it might even work out to be a solid investment. I, however, favor an approach that says every investment I make counts. We invest in businesses, not stocks, and thus must want to own, or be comfortable owning the entire company if we have the necessary capital.We must also have an open line of communication with the management team, and understand their strategy for enhancing shareholder value. We will only make an investment when a stock is trading at a significant discount to intrinsic value (30% +), and importantly, there must be the potential for a near-term (3-18 month) catalyst that will help surface that discount. Catalysts could include a financial restructuring, sale of an asset, sale of the company, change in management, or transformative acquisition.
How has Mario Gabelli influenced your investment strategy? Has anyone else influenced you?
Mario is a legend in the world of value investing. He hasn’t just influenced my approach, but that of thousands of investors. Textbooks credit him with developing the notion of Private Market Value (PMV), which we define as the price that an informed industrialist would pay to acquire an entire business. He is a consistent and incredibly valuable source of ideas, and molds our team of analysts on a daily basis so that we are thorough and think through scenarios that might often be ignored. His tremendous experience through various market cycles allows us to take advantage of market opportunities to both buy and sell into irrational prices.
Do you think that a concentrated portfolio is more risky, and while we are on that question, can we ask what you define as risk?
Risk is losing money, both on a relative and absolute basis. I strongly believe that our concentrated fund is less risky than the market in general as our intensive research allows us to identify and invest in great businesses with a substantial margin of safety. This may not mean that we will outperform on a daily basis, but over time our portfolio will deliver a much better return while assuming less risk.
What are your top five picks? Can you briefly tell us the pitch for each stock? What are the catalysts for these five companies, and which can unlock shareholder value?
Our three largest investments as of September 30, 2012 were:
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