Mario Gabelli’s Gabelli Asset Fund shareholder commentary for first quarter 2014.
To Our Shareholders,
For the quarter ended March 31, 2014, the net asset value (“NAV”) per Class AAA Share of The Gabelli Asset Fund increased 0.9% compared with an increase of 1.8% for the Standard & Poor’s (“S&P”) 500 Index. See page 2 for additional performance information.
Gabelli Asset Fund: An Unchanged Process in an Ever-Changing World
Stocks rose modestly in the first quarter of 2014, despite the largely negative geopolitical and macroeconomic events that dominated the headlines.
The long term implications of the Russian Federation’s annexation of Crimea are still yet to be determined. Will Russia make a similar move in other provinces in Ukraine or attempt to reclaim other parts of the former Soviet Union that are now independent countries? What will be the economic impact to Russia and its main trading partners? The short term effect has been for the Russian stock market to decline 9%, along with a 6% decline in the Russian ruble.
Other emerging market currencies also fell in the first quarter, most notably the Venezuelan bolivar, which underwent a massive “stealth” devaluation when the embattled government introduced a secondary currency exchange market known as SICAD II; the Argentine peso (–18%) and the Brazilian real (–4%) also declined during the quarter. U.S. based multinationals with significant operations in these markets will have a headwind to reported results this year, as profits in these countries must be translated back into U.S. dollars at a lower exchange rate. We also are watching developments in other important markets closely, including China dealing with a slightly slower but perhaps more sustainable growth rate and Japan continuing its attempt to re-inflate under the leadership of Prime Minister Shinzo Abe and Governor of the Bank of Japan Haruhiko Kuroda.
Back in the U.S., the economy continues to expand – albeit slowly. GDP growth was 2.6% in the fourth quarter of 2013, and unemployment held relatively steady at 6.7% at the end of March 2014. Much of the country experienced nearly unprecedented cold temperatures, as well as several severe snowstorms, for much of the first quarter. While the reduced consumer spending and cancelled travel that resulted may have an impact on first quarter earnings, we expect that most expenditures will ultimately be delayed rather than eliminated altogether. Janet Yellen was sworn in as Chair of the Board of Governors of the Federal Reserve System during the quarter. While we expect Ms. Yellen to continue most of the policies of her predecessor, we note that she also seems committed to continuing the so-called “taper,” as the pace of open market asset purchases was reduced to $55 billion per month starting in April, from $85 billion in December 2013. This gradual withdrawal of stimulus has not led to a decline in asset prices – yet.
Gabelli Asset Fund: Deals, Deals, and More Deals
Deals, Deals, and More Deals On a positive note, deal-making activity increased substantially during the first quarter, with worldwide mergers and acquisitions (M&A) value growing 36%, net of competing bids, to $756 billion. Within these figures, we note that cross border transactions were up 86% to $245 billion. We believe that we will see more of these kinds of transactions as the “Fifth Wave” of takeover activity since World War II continues to build momentum. In January, Fund holding Beam, Inc. (0.9% of net assets as of March 31, 2014) agreed to be acquired by Suntory Holdings, a leading Japanese beverage company, for $83.50 per share in cash. The deal price was a 25% premium to BEAM’s $67 closing price and represents just over 18x our 2014 EBITDA estimate of approximately $850 million. While the multiple is fairly full, it is consistent with our estimate of Private Market Value, and we believe it is appropriate for a high quality asset such as BEAM, with great brands, margins, growth prospects, pricing power, and distribution. The transaction is expected to close in the second quarter. Two media holdings were also the subject of M&A during the first quarter. After being pursued through most of 2013 by Charter Communications (less than 0.05%), Time Warner Cable (0.3%) agreed to be acquired by Comcast (0.4%) in an all stock transaction. The combined company would serve over 30% of all U.S. pay- television households and thus has drawn close regulatory scrutiny. We believe the odds favor a Comcast closing on current terms early in 2015. Another bidding war took place across the Atlantic, as French media and telecom conglomerate Vivendi (0.5%) auctioned its wireless subsidiary, SFR. Cable entity Numericable and wireless competitor Bouygues submitted competing proposals; in April, Vivendi chose to move forward with Numericable, allowing Vivendi to continue its transition to a pure content company and providing it with significant excess capital, which we expect will be returned to shareholders. With extremely attractive financing available to acquirers, we expect deal activity to continue to increase over time, albeit not in a linear fashion.
Gabelli Asset Fund’s stock holdings
Let’s Talk Stocks The following are stock specifics on selected holdings of the Fund. Favorable earnings prospects do not necessarily translate into higher stock prices, but they do express a positive trend that we believe will develop over time. Individual securities mentioned are not necessarily representative of the entire portfolio. For the following holdings, the percentage of net assets and their share prices are presented as of March 31, 2014.
AMETEK, Inc. (NYSE:AME) (1.7% of net assets as of March 31, 2014) ($51.49 – NYSE) is a leading global manufacturer of analytical instruments for the process, aerospace, and industrial markets, and a leading producer of electric motors and blowers for the floor care and outdoor power equipment markets. In the near term, the company continues to experience significant growth in its longer cycle businesses in the aerospace, power generation, and process industries. Longer term, the company continues to make acquisitions to augment growth. In the Electronic Instruments Group, AMETEK expects one half to two thirds of its revenue growth to come from acquisitions. The company is focused on acquiring differentiated businesses with revenues of $30-$100 million. Differentiated businesses compete on the basis of product capability, have higher growth rates, and offer superior returns. In the Electromechanical Group, AMETEK’s key strategy is to reduce costs by increasing efficiency and moving noncore operations to low cost countries such as Mexico, the Czech Republic, and China.
Beam Suntory Inc (NYSE:BEAM) (0.9%) ($83.30 – NYSE), headquartered in Deerfield, Illinois, is a leading producer of distilled spirits with brands including Jim Beam, Sauza, Maker’s Mark, Courvoisier, Pinnacle, Cruzan, Knob Creek, Skinnygirl, and Effen. Beam competes in the ~$500 billion global spirits industry and is the leader in the $7 billion bourbon whiskey category, which is currently the fastest growing market segment in the U.S. Beam has strong brands, pricing power, top and bottom line momentum, and is one of the only companies in the industry without a family that owns a controlling stake in the business. As such, we have long considered Beam a compelling acquisition candidate for strategic acquirers. On January 13, 2014, Beam announced that it agreed to be