The U.S. stock market rose to a record closing high at the end of April, scoring its best monthly gain since November. The spring rally was powered by a strong stimulus fuelled economic recovery and corporate earnings reports that by month end had topped analysts estimates by a wide margin. Berkshire Chairman Buffett commented at the annual meeting on May first that U.S. fiscal and monetary stimulus ‘did the job,” and 85% of economy is running in ‘super high gear’. However, the U.S. economy remains about eight million jobs below its pre-pandemic level in February 2020. Continued gains at March’s pace of 916,000 new jobs and a six percent unemployment rate would take a while to catch up and may bump into the time frame when the Fed is expected to start tapping on the monetary brakes. Fed chairman Powell addressed this market concern at the April FOMC meeting when he said, “We don’t have to get all the way to our goals to taper asset purchases, we just need to make substantial further progress.”
As we look for new investment opportunities, our equity research continues to focus on infrastructure. President Biden’s American Jobs Plan (AJP) has spending proposals targeting transportation, including roads, bridges, train service, and the transition to electric vehicles. Plus, upgrading public water systems and improving broadband access and connectivity to rural Americans.
Mr Buffett commented on the current backdrop for deals from Berkshire’s perspective. Here are some of the dots. Berkshire has not made a major acquisition since 2016 and has $70 billion to $80 billion of its $145.4 billion cash hoard it would “love to put to work.” But the ‘casino’ effect from SPACS has made it difficult to compete for deals. Despite environmental concerns, Mr. Buffett said he would ‘not feel uncomfortable’ owning ‘the entire business’ of Chevron, but did not say that was his intention. Berkshire held Chevron shares at year-end 2020. Chevron’s market capitalization is about $200 billion compared to about $630 billion for Berkshire. An upbeat Mr. Buffett said he is looking forward to seeing everyone at next year’s annual meeting in Omaha.
M&A activity remained vibrant in April with nearly $500 billion in newly announced transactions, providing merger arbitrageurs with an expanded menu of investment opportunities. Performance in April was bolstered by deals that made continued progress towards closing, improved deal terms, and deals that were completed in April. Notably, Alexion’s acquisition by AstraZeneca received antitrust approval in the U.S. without an extended review, in what was viewed as an early test of the Biden Administration’s approach to pharmaceutical mergers. Kansas City Southern received an overbid from Canadian National Railway, and Suez reached an agreement in principle to be acquired by Veolia under improved terms. We believe these dynamics highlight a desire and urgency to acquire strategic assets, and believe it bodes well for a healthy M&A environment.
After a record first quarter, April’s global convertible market issuance returned to a more normal cadence and continued on more attractive terms than previously occurred at the beginning of the year. The market moved higher as underlying equities advanced, but many new issues traded lower. There were two reasons for these moves. First, the convertible valuations were a bit stretched. It was reasonable for companies to take advantage of the market to improve their capital structures, but convertibles with zero coupons and 60 or 70% premiums very rarely make attractive investments. Second, many of these convertibles came from growth companies where high valuations were somewhat dependent on low interest rates. As investors include higher interest rates in their valuations, weakness has developed in growth equity and in turn weakness in their aggressively priced convertibles. This has left the convertible market in a compelling place. We anticipate that issuance will continue this year, as the convertible market is one of the most attractive ways for companies to raise capital while allowing investors to participate in equity performance in a risk adjusted way. There are also many existing converts that are now more attractively priced and offer asymmetrical profiles that should participate in more equity upside than downside.
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To access our proprietary value investment methodology, and dedicated merger arbitrage portfolio we offer the following UCITS Funds in each discipline:
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
GAMCO CONVERTIBLE SECURITIES
GAMCO Convertible Securities’ objective is to seek to provide current income as well as long term capital appreciation through a total return strategy by investing in a diversified portfolio of global convertible securities.
The Fund leverages the firm’s history of investing in dedicated convertible security portfolios since 1979.
The fund invests in convertible securities, as well as other instruments that have economic characteristics similar to such securities, across global markets (but the fund will not invest in contingent convertible notes). The fund may invest in securities of any market capitalization or credit quality, including up to 100% in below investment grade or unrated securities, and may from time to time invest a significant amount of its assets in securities of smaller companies. Convertible securities may include any suitable convertible instruments such as convertible bonds, convertible notes or convertible preference shares.
By actively managing the fund and investing in convertible securities, the investment manager seeks the opportunity to participate in the capital appreciation of underlying stocks, while at the same time relying on the fixed income aspect of the convertible securities to provide current income and reduced price volatility, which can limit the risk of loss in a down equity market.
Class I USD LU2264533006
Class I EUR LU2264532966
Class A USD LU2264532701
Class A EUR LU2264532610
Class R USD LU2264533345
Class R EUR LU2264533261
Class F USD LU2264533691
Class F EUR LU2264533428
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Some of the statements in this presentation may contain or be based on forward looking statements, forecasts, estimates, projections, targets, or prognosis (“forward looking statements”), which reflect the manager’s current view of future events, economic developments and financial performance. Such forward looking statements are typically indicated by the use of words which express an estimate, expectation, belief, target or forecast. Such forward looking statements are based on an assessment of historical economic data, on the experience and current plans of the investment manager and/or certain advisors of the manager, and on the indicated sources. These forward looking statements contain no representation or warranty of whatever kind that such future events will occur or that they will occur as described herein, or that such results will be achieved by the fund or the investments of the fund, as the occurrence of these events and the results of the fund are subject to various risks and uncertainties. The actual portfolio, and thus results, of the fund may differ substantially from those assumed in the forward looking statements. The manager and its affiliates will not undertake to update or review the forward looking statements contained in this presentation, whether as result of new information or any future event or otherwise.