October spooked market participants universally with US stocks enduring their worst month since the financial crisis. Issues at hand circle around concerns about peak earnings and growth, tighter financial conditions, fears of a Fed policy mistake, a potential credit bubble and selling pressure in crowded trades. Tensions have been further compounded by geopolitical worries, including ongoing trade tensions with China and deteriorating Chinese/US relations; Italy’s budget chaos and fears of a recession; uncertainty regarding the upcoming US congressional elections; and Brazil’s election of Jair Bolsonaro, joining the growing ranks of populists across the world.
The U.S. economy is still on a roll and this is reflected by the outperformance of U.S. equities versus foreign stock markets. More broadly, payrolls are increasing, wages are growing at the fastest rate since 2009, and unemployment is at a 49 year low. Consumer spending is doing well and should get a boost from falling oil prices while global investors continue to be attracted by America’s low tax rate, economic strength, corporate profit growth, and ongoing efforts to achieve less regulation.
There are undoubtedly countless factors that could go wrong with the equity market. With that in mind, much could still go right. Earnings growth rates may be peaking, but earnings are still strong; outcomes in the US midterm elections will be known November 6th, removing the angst over potential outcomes; and the world could be pleasantly surprised following a meeting between Presidents Trump and Xi at the upcoming G-20 summit, easing concerns over escalating challenges between two of the world’s superpowers. With no compass to turn to, we continue to orient ourselves by looking at valuations, which for global stocks look to be at attractive levels not seen for over two years.
One specific investment dynamic I would like to highlight is in regards to the music industry, which are changing fast with Sony continuing to strategically position itself to the benefit of shareholders. After gaining European Commission approval in late October, Sony will acquire EMI Music Publishing in a $2.3 billion deal without conditions. The EMI acquisition will make Sony the global industry leader with a market share of about 26 percent. Universal Music Group and Warner Music Group are the major competitors in an industry that has now been revitalized by digital streaming services. As a copyright manager, Sony can earn revenues from direct deals with Spottily, Apple Music, Google Play, SoundCloud and YouTube. At the end of October, returning to the creative roots of its original Sony Walkman TPS-L2 in 1979 and as a logical extension of the music business, Sony audio announced that it aimed to regain its leadership position in headphones.
Column by Gabelli Funds, written by Michael Gabelli
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GAMCO MERGER ARBITRAGE
GAMCO Merger Arbitrage UCITS Fund, launched in October 2011, is an open-end fund incorporated in Luxembourg and compliant with UCITS regulation. The team, dedicated strategy, and record dates back to 1985. The objective of the GAMCO Merger Arbitrage Fund is to achieve long-term capital growth by investing primarily in announced equity merger and acquisition transactions while maintaining a diversified portfolio. The Fund utilizes a highly specialized investment approach designed principally to profit from the successful completion of proposed mergers, takeovers, tender offers, leveraged buyouts and other types of corporate reorganizations. Analyzes and continuously monitors each pending transaction for potential risk, including: regulatory, terms, financing, and shareholder approval.
Merger investments are a highly liquid, non-market correlated, proven and consistent alternative to traditional fixed income and equity securities. Merger returns are dependent on deal spreads. Deal spreads are a function of time, deal risk premium, and interest rates. Returns are thus correlated to interest rate changes over the medium term and not the broader equity market. The prospect of rising rates would imply higher returns on mergers as spreads widen to compensate arbitrageurs. As bond markets decline (interest rates rise), merger returns should improve as capital allocation decisions adjust to the changes in the costs of capital.
Broad Market volatility can lead to widening of spreads in merger positions, coupled with our well-researched merger portfolios, offer the potential for enhanced IRRs through dynamic position sizing. Daily price volatility fluctuations coupled with less proprietary capital (the Volcker rule) in the U.S. have contributed to improving merger spreads and thus, overall returns. Thus our fund is well positioned as a cash substitute or fixed income alternative.
Our objectives are to compound and preserve wealth over time, while remaining non-correlated to the broad global markets. We created our first dedicated merger fund 32 years ago. Since then, our merger performance has grown client assets at an annualized rate of approximately 10.7% gross and 7.6% net since 1985. Today, we manage assets on behalf of institutional and high net worth clients globally in a variety of fund structures and mandates.
Class I USD – LU0687944552
Class I EUR – LU0687944396
Class A USD – LU0687943745
Class A EUR – LU0687943661
Class R USD – LU1453360825
Class R EUR – LU1453361476
GAMCO ALL CAP VALUE
The GAMCO All Cap Value UCITS Fund launched in May, 2015 utilizes Gabelli’s its proprietary PMV with a Catalyst™ investment methodology, which has been in place since 1977. The Fund seeks absolute returns through event driven value investing. Our methodology centers around fundamental, research-driven, value based investing with a focus on asset values, cash flows and identifiable catalysts to maximize returns independent of market direction. The fund draws on the experience of its global portfolio team and 35+ value research analysts.
GAMCO is an active, bottom-up, value investor, and seeks to achieve real capital appreciation (relative to inflation) over the long term regardless of market cycles. Our value-oriented stock selection process is based on the fundamental investment principles first articulated in 1934 by Graham and Dodd, the founders of modern security analysis, and further augmented by Mario Gabelli in 1977 with his introduction of the concepts of Private Market Value (PMV) with a Catalyst™ into equity analysis. PMV with a Catalyst™ is our unique research methodology that focuses on individual stock selection by identifying firms selling below intrinsic value with a reasonable probability of realizing their PMV’s which we define as the price a strategic or financial acquirer would be willing to pay for the entire enterprise. The fundamental valuation factors utilized to evaluate securities prior to inclusion/exclusion into the portfolio, our research driven approach views fundamental analysis as a three pronged approach: free cash flow (earnings before, interest, taxes, depreciation and amortization, or EBITDA, minus the capital expenditures necessary to grow/maintain the business); earnings per share trends; and private market value (PMV), which encompasses on and off balance sheet assets and liabilities. Our team arrives at a PMV valuation by a rigorous assessment of fundamentals from publicly available information and judgement gained from meeting management, covering all size companies globally and our comprehensive, accumulated knowledge of a variety of sectors. We then identify businesses for the portfolio possessing the proper margin of safety and research variables from our deep research universe.
Class I USD – LU1216601648
Class I EUR – LU1216601564
Class A USD – LU1216600913
Class A EUR – LU1216600673
Class R USD – LU1453359900
Class R EUR – LU1453360155
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