Mario Gabelli’s Asset Fund commentary for the fourth quarter 2014

To Our Shareholders,

For the quarter ended December 31, 2014, the net asset value (“NAV”) per Class AAA Share of The Gabelli Asset Fund increased 4.0% compared with an increase of 4.9% for the Standard & Poor’s (“S&P”) 500 Index. See page 2 for additional performance information.

Annual (P)review

More than in previous years, 2014 offered many surprises, both positive and negative. We suspect few prognosticators correctly predicted more than a handful of the headline economic indicators below:

Mario Gabelli Asset Fund

Mario Gabelli Asset Fund

Barron’s 2015 Roundtable

Mario Gabelli, our Chief Investment Officer, has appeared in the prestigious Barron’s Roundtable discussion annually since 1980. Many of our readers enjoyed the inclusion of selected and edited comments from Barron’s Roundtable in previous reports to shareholders. As is our custom, we are including selected comments of Mario Gabelli from Barron’s 2015 Roundtable Part 1 and Part 3, published on January 19 and February 2, 2015, respectively.

BARRON’S ROUNDTABLE

MARIO GABELLI

Chairman and Chief Investment Officer – Value Portfolios

GAMCO Investors, Inc.

Whether you favor tarot cards, tea leaves, or crystal balls, it’s hard to predict the future. Just ask anyone who correctly forecast that oil prices would fall more than 50% in the past few months — and good luck finding anyone who did.

Rising to the challenge of divining economic trends, market moves, and especially the actions of the world’s central bankers, the members of the Barron’s Roundtable took their usual seats last Monday at the Harvard Club of New York and gamely got down to the annual business of making sense of the world for investors, notwithstanding some good natured grumbling about the perils of the forecasting trade. Whether these market seers ultimately get it right or wrong, or get some things right and others wrong, they are worth a serious listen.

In a day-long session that covered everything from macroeconomics to their investment picks for 2015, the Roundtable members debated the causes of crude’s plunge and its effect on consumers; euronomics and Abenomics; the limits of leverage; and much, much more. On the whole, they expect interest rates to stay unnaturally low, and the U.S. to lead the world in economic growth. Yet, they doubt that will translate into robust gains for the stock market. Scott Black’s expectation that the Standard & Poor’s 500 will return 10% this year — an 8% price advance anda 2% dividend yield — was as rosy as  it got. Marc Faber, we feel compelled to warn you, thinks the market already has made its high for 2015.

Mario Gabelli: Unlike some in this room, I fill up my own car with gas. The impact of lower spot prices hits right away by giving consumers more cash in their pockets or lower credit card bills. It was only around Thanksgiving that the price at the pump collapsed. The effect is appearing on credit card statements now. The consumer accounts for 70% of gross domestic product. His costs are going down. Food will be the next thing that falls in price. This is an extraordinary after tax saving, and it will start working in the real economy.

Mario Gabelli: These are lagging figures, put together by people who don’t go to gas stations. I talk to the guys who are pumping gas, and they say the consumer is buying more beer.

When I talk to many S&P 500 companies about their businesses in Asia and Europe, there aren’t many rays of hope coming from some of those markets. There is a general consensus around 3% GDP growth in the U.S. I wouldn’t be surprised to see downward pressure on that estimate as 2015 unfolds. It just feels like too many things are going to drag on us, including a decline in energy prices. One of my Roundtable stock picks, perhaps not surprisingly, is an oil company. You have to buy when things look really bad. That said, the U.S. could have a tougher year than people expect.

Mario Gabelli: I’m going back to the consumer. His net worth is at an all time high. Wages are starting to rise in certain industries, but the psychology is fantastic. When the consumer buys gas every week, he feels good.

Schafer: You spend a lot of time at gas stations. How many cars do you have, Mario?

Mario Gabelli: You city guys send someone else to fill up your car. Go talk to the guy who fills it up. You learn a lot by asking. Capital investment accounts for 12% of the economy. The government is going to examine ways to improve infrastructure. The midterm election resulted in a Republican-controlled Congress, which has a clear vision of less regulation and improving the rate of return on investment.

Capital spending by the major oil companies and the independents could drop below $600 billion this year from an estimated $725 billion last year, which will be a challenge, but it’s not a big deal. The housing recovery has traction, and local-government spending is up. The U.S. economy could grow by 2.75% to 3.25% this year, in real terms.

The U.S. is expected to be 22% of the global economy this year. The European Union is expected to be 25%. But, in relation to the oil surprise, what is [Russian President Vladimir] Putin going to do? Is he going to help the Saudis deal with Iran? A year ago, nobody thought about oil, or Putin invading Crimea, or the spread of Ebola. Nobody thought about the psychological impact of these events, which prompted investors to seek refuge in the U.S. bond market, driving down yields. My bet is that U.S.-centric companies do well this year.

Mario, what is your market view?

Mario Gabelli: I’m looking at the moving parts. The euro is $1.18 today. It was $1.37 a year ago. For S&P 500 companies operating in Europe, the currency will be a drag. Energy
earnings will be a big drag. On the other hand, if interest rates go up in the spring, that will help banks’ net interest margins. Companies are going to maintain profit margins as best they can. With the Republicans gaining control of the Senate and the House, the rest of the world is saying this socialist president won’t gain any more traction. Thus, the U.S. is a good place to put your money. A lot of money is moving into the U.S. market, and it isn’t going into small-caps. It is going into large-caps. Foreign investors are sector allocators. Financial engineering will continue, and activist investors are another spur to specific stocks. Putting it all together, the market could rise 2% or 3% this year.

See full PDF below.