M&A Activity is Off to a Strong Start Thus Far in 2019

  |   For  |  0 Comentarios

M&A Activity is Off to a Strong Start Thus Far in 2019
Wikimedia CommonsFoto: Petar Milošević . La actividad de fusiones y adquisiciones ha tenido un fuerte comienzo en 2019

December’s market volatility created opportunities which contributed to January’s results, particularly on spreads that narrowed (including several which closed):

  • Shire plc (SHPG-NASDAQ), a pharmaceutical company focused on developing treatments for rare diseases, was acquired by Takeda Pharmaceuticals on January 4. The deal received approval from shareholders of both companies in December, which was the final requirement. Shire shareholders received $90.99 cash and 5.034 new Takeda shares, valuing the transaction at approximately $80 billion.
  • TESARO Inc. (TSRO-NASDAQ), an oncology-focused biopharmaceutical company that develops treatments for solid tumors, was acquired by GlaxoSmithKline plc for $75 cash per share, or about $5 billion.
  • Apptio Inc. (APTI-NASDAQ), a provider of cloud-based business management software, was acquired by Vista Equity Partners for $38 cash per share, or about $1.7 billion.
  • Imperva Inc. (IMPV-NASDAQ), a software development company focused on security applications and services, was acquired by Thoma Bravo for $55.75 cash per share, or about $2 billion.

 M&A activity is off to a strong start thus far in 2019, and we are finding attractive opportunities to deploy capital. New deals announced in January included:

  • Celgene Corp. (CELG-NASDAQ), a biopharmaceutical company that develops treatments for cancer and immune-inflammatory related diseases, agreed to be acquired by Bristol-Myers Squibb for $50 cash and 1.0 share of Bristol-Myers common stock for each share of Celgene, or about $89 billion.
  • First Data Corp. (FDC-NYSE), a global provider of electronic payment solutions, agreed to be acquired by Fiserv, Inc. for 0.303 shares of Fiserv common stock for each share of First Data, or about $38 billion.
  • Loxo Oncology, Inc. (LOXO-NASDAQ), which develops drugs for the treatment of solid tumors, agreed to be acquired by Eli Lilly for $235 cash per share, or about $8 billion.

We expect ongoing deal activity will provide further prospects to generate returns uncorrelated to the market.

Column by Gabelli Funds, written by Michael Gabelli

 

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

Disclaimer:
The information and any opinions have been obtained from or are based on sources believed to be reliable but accuracy cannot be guaranteed. No responsibility can be accepted for any consequential loss arising from the use of this information. The information is expressed at its date and is issued only to and directed only at those individuals who are permitted to receive such information in accordance with the applicable statutes. In some countries the distribution of this publication may be restricted. It is your responsibility to find out what those restrictions are and observe them.
 
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.
 

After a Great January, the Small and Mid-Cap Space Continues to be Well Valued

  |   For  |  0 Comentarios

After a Great January, the Small and Mid-Cap Space Continues to be Well Valued
Pixabay CC0 Public DomainPhoto: Karthik Subramanian / Pexels CC0. Después de un gran enero, el segmento de pequeña y mediana capitalización sigue estando bien valorado

U.S. stocks started 2019 with the best January since 1987 and the best monthly gain since 2015. This sets up 2019 for a positive annual return based on historical data since 1936. The FOMC statement that the Fed would now be ‘patient’ on future rate changes and Chairman Powell’s statement that balance sheet ‘normalization’ would end sooner than expected, plus a robust employment report, all combined to spark investor sentiment to buy stocks.

Gabelli’s Private Market Value (PMV) with a Catalyst™ stock selection research ideas — Liberty Braves (BATRA), Energizer Holdings (ENR), 21st Century Fox (FOX), Herc Holdings (HRI), MGM Resorts International (MGM), Navistar International (NAV), Griffon (GFF) and updates on Textron (TXT) and GCP Applied Technologies (GCP) — were highlighted as seven ‘stock picks’ and two updates at BARRON’S 2019 Roundtable published in the January 21 issue.

Cambridge, MA based GCP Applied Technologies is a producer of cement, concrete additives, and weatherproofing for commercial construction and benefits from infrastructure spending. Swiss chemical company Sika AG is acquiring French rival Parex for $2.5 billion in the ongoing consolidation of the building materials industry. Sika recently fended off a hostile takeover from France’s Saint-Gobain.  As a niche player, GCP is an appealing potential target.
Providence, RI based Textron continues to take share with new models as the long cycle in business jets unfolds. NetJets, the shared jet ownership division of Berkshire Hathaway, recently announced a deal to buy up to 175 Cessna Citation Longitude and 150 Hemisphere jets. Textron has a top notch management team.                      

Global M&A announced deal volumes were $4.1 trillion in 2018 with a strong first half driven by ‘megadeals’ greater than $10 billion in size. Companies will continue to focus on unlocking value with deal activity in 2019 as spin-offs and split-offs, often catalyzed by increased pressure by activists, remain center stage.

We continue to scour the market for great companies to invest in and are focused on fundamental opportunities globally. The small and mid-cap space continues to be well valued and the long term upside, thanks to financial engineering, serves to be fruitful for investors. The consumer and a focus on global infrastructure and development are major themes to keep an eye on as we begin the year. Trump and Trade remain at the forefront in the U.S. and as the dust settles globally economic questions remain open ended throughout Europe and Asia, leading many to raise cash and reevaluate the markets as future volatility remains a key driver for both sentiment and relations both at the personal and macro levels.

Column written by Michael Gabelli from Gabelli Funds

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

Disclaimer:
The information and any opinions have been obtained from or are based on sources believed to be reliable but accuracy cannot be guaranteed. No responsibility can be accepted for any consequential loss arising from the use of this information. The information is expressed at its date and is issued only to and directed only at those individuals who are permitted to receive such information in accordance with the applicable statutes. In some countries the distribution of this publication may be restricted. It is your responsibility to find out what those restrictions are and observe them.
 
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.
 

Return of the Fed Put

  |   For  |  0 Comentarios

El retorno de la "Fed put"
Pixabay CC0 Public DomainCourtesy photo. Return of the Fed Put

Birth of the Fed Put A put, is an option that increases in value when the underlying security’s price falls below a certain level.  One of its most common usages is to protect a portfolio against a market decline.

The famous “Fed put” refers to the notion that the Federal Reserve will take action to support the equity market in times of increased risk and volatility. Since Alan Greenspan became chairman of the Fed during the 1980s, there has been a definitive pattern of the central bank increasing liquidity during times of crisis. This includes taking action to inject liquidity during major downturns in an effort to “fix” the stock market. Each successive time that the Fed does this, investors have become further reliant on this free put option. Eventually, the Fed put became priced in, pushing equity valuations higher and encouraging investors to take excessive risk. This has led to many criticisms of the Fed put for creating “moral hazard.”

Originally, the Fed put was known as the “Greenspan put.” When Mr. Greenspan finally retired in 2006 after leading the Fed for almost 2 decades, Ben Bernanke and then Janet Yellen both continued his policy of taking action to support the markets during times of crisis. This led to the Greenspan put morphing into what we now know as the Fed put.  

When President Trump appointed Jerome Powell as the 16th Chairman of the Federal Reserve in early 2018, investors assumed he would continue the tradition of the Fed put. Investors were even willing to tolerate (albeit grudgingly) further interest rate increases by the Fed as long as they knew that the Fed put remained in place. With this understanding in place, Jerome Powell was able to increase the Fed’s target rate every quarter, which was a much faster pace than his predecessor Janet Yellen had done.  

Death of the Fed Put

As the Fed raised rates throughout 2018 while imposing quantitative tightening through the reduction of its $4.5 trillion balance sheet, President Trump openly criticized both Powell and the Fed. The President warned that the higher rates were going to choke off economic growth. Of course, these criticisms went mainly unheeded by the Fed as it maintained its independence from the President and steadfastly kept on its course to raise rates. 

In October of 2018, Jerome Powell shocked the markets with the “we’re a long way from neutral” interest rates comment. The market was already dealing with the lingering trade war with China, the threat of a global economic slowdown, and the waning economic tailwind of the tax cuts in the US. Powell’s comments shook many investors faith in the Fed put as many feared the Fed was not acknowledging the many issues while continuing on its path to raise rates. In December, Powell doubled down on his comments from October saying that the Fed would stay the course on increasing rates and would continue to shrink its balance sheet at the same pace. This sent an already struggling market into another tail-spin that culminated in the Christmas Eve decline that saw the Dow Jones plunge more than 650 points. 

This prompted David Tepper, who manages $14 billion at Appaloosa Management, to say, “Powell basically told you the Fed put is dead.” The market agreed with this sentiment, as it appeared the Fed was prepared to let the market fall without even attempting to intervene. 

Return of the Fed Put

“Feel the market, don’t just go by meaningless numbers.” President Donald Trump’s tweet to the Fed

However, the market had not been completely forsaken by Powell.  In early January, Powell abruptly changed his tune (maybe he was finally convinced by Trump’s tweets to feel the market) and acknowledged that the Fed will be closely watching market signals and will be patient with its monetary policy approach. 

Powell also indicated that the Fed would be willing to adjust its balance sheet reduction efforts if needed, which sounded a lot like he was willing to inject liquidity in the system if the markets took another downturn. Investors that had feared the Fed was being to hawkish and was going to kill the economy, shouted a collective hallelujah as the market rallied strongly on the recognition that the Fed put was back! 

Column by Charles Castillo, Senior Portfolio Manager at Beta Capital Wealth Management, Crèdit Andorrà Financial Group Research.

#10YChallenge for the Mexican Pension Funds’ AUM

  |   For  |  0 Comentarios

#10YChallenge for the Mexican Pension Funds' AUM
Pixabay CC0 Public DomainFoto cedida. El #10YChallenge de los activos bajo administración de las Afores

The assets under management of the Mexican Pension funds, or Afores, expressed in dollars grew 149%, when the assets passed from 67.771 to 168.583  billion dollars between December 2008 and December 2018. These figures expressed in dollars include the movement of the exchange rate of 13.83 pesos to 19.65 pesos (+ 42%) in 10 years.

In December 2008 there were 19 Afores in the market of which 10 prevail today because of various mergers. For some Afores, their growth came about because of an aggressive commercial strategy, as well as attractive yields, while for others it was due to merges.

Of the 10 Afores that today prevail six have merged others and only four haven´t (Azteca, Coppel, Invercap and PensiónISSSTE) according to CONSAR document: Corporate events in the Savings System for Retirement. A total of six mergers and purchases happened between the years 1998-2008 and 11 were made in the last 10 years. The purchase of MetLife by Principal (2018) isn´t identified in this document.

Enlarge

The Afores with the highest growth in assets in terms of dollars are:

  1. Coppel (+ 1,269%). Its growth is explained by a specialization in the low-income worker and without any purchase. Coppel went from a 1.1% market share to 6.2% in the last 10 years that leads it to occupy the 7th place. It stands at 94 million dollars (1%) of PensiónISSSTE who is in 6th place. Afore Coppel manages 10,406 million dollars.
  2. XXI-Banorte (+ 818%). Is growtht comes from the mergers of: Ahorra Ahora (2009), IXE (2009), Argos (2009), Banorte Generali (2012) and Bancomer (2013). In 10 years, its market share grew from 6.1% to 22.5%, currently the largest. Afore XXI-Banorte manages 37,882 million dollars.
  3. Azteca (+ 410%) just as Coppel has specialized in the low-income worker and hasn´t made any purchase of Afore. Between December 2008 and December 2018 its market share went from 1.1% to 2.2% and is in the 10th place. Afore Azteca manages 3,785 million dollars.
  4. Principal (+ 317%). It has merged the Afore of: Atlantic-Promex (1998), Zurich (2002), Tepeyac (2003), HSBC (2011) and last year to MetLife (2018). In 10 years, it rose from 4.0% to 6.8% market share and now is in the 5th place. Afore Principal manages 11,409 million dollars.
  5. Profuturo (+ 247%). It has merged the Afore of: Previnter (1998), Scotia (2010), Afirme (2014). Its market share increased from 10.5% to 14.7%. This Afore occupies the 4th place and is only 1% to reach Sura who occupies position 3. Afore Profuturo manages 24,789 million dollars.
  6. PensiónISSSTE (+ 229%). Its growth has been organic without having made any acquisition. Its market share increased from 4.7 to 6.2% and now is in 6th place. Afore PensiónISSSTE manages 10,500 million dollars.
  7. Sura (+ 197%). Acquired Afore ING (2012) who previously merged Santander (2008). Although Sura has remained in place 3, its market share increased from 12.4 to 14.8%. Afore Sura manages 24,928 million dollars.
  8. Invercap (+ 169%). It has not made any merger. Its market share has only increased from 4.7 to 5.1% and holds the 8th place, same place it was 10 years ago. Afore Invercap manages 8,593 million dollars.
  9. Citibanamex (+ 148%). Merged Garante (2002). Its market share has practically maintained it since in 2008 it was 18% and in 2018, it is 17.9%, which has allowed it to hold the 2nd place. Afore Citibanamex administers 30,214 million dollars.
  10. Inbursa (-4%). Acquired to Capitaliza (1998). Its market share fell from 9.3% to 3.6% and is the only Afore that reflects a reduction in assets under management in 10 years (-4% in dollars) and holds the 8th place. Afore Inbursa manages 6,077 billion dollars.

This year Profuturo could rise from 4th to 3rd place beating SURA as the difference is only 0.6%, while Coppel could do the same to PensiónISSSTE as the difference is 0.9%, which would allow it to rise from 7th to 6th place.

Surely, the consolidation process will continue in the coming years.
 

Worldwide M&A Activity Totaled 4 Trillion Dollars During 2018

  |   For  |  0 Comentarios

Los acuerdos de fusiones y adquisiciones en 2018 superaron los cuatro billones de dólares
Pixabay CC0 Public DomainPhoto: MichaelGaida. Worldwide M&A Activity Totaled 4 Trillion Dollars During 2018

Worldwide deal activity totaled $4.0 trillion during 2018, an increase of 19% compared to 2017, and only the third year on record M&A has passed the $4 trillion milestone. Global growth has been a theme of the current wave of M&A, and cross-border deal activity totaled $1.6 trillion during the year, a 32% increase over 2017 and the strongest year for cross-border M&A since 2007. Dealmaking in Europe was $1.0 trillion, the highest total in 11 years.

The merger arbitrage universe had a number of positive developments recently that met the headwinds of spreads widening. Specifically:

  • Tribune Media (TRCO-NYSE), a media company that owns television broadcast stations as well as other media assets, agreed to be acquired by Nexstar Media Group for $46.50 cash per share, or about $7 billion. Previously, in May 2017, Tribune agreed to be acquired by Sinclair Broadcast. Tribune’s deal with Nexstar is expected to close in the third quarter of 2019, and shareholders will receive a “ticking fee” consideration of approximately $0.30 per month if the transaction has not closed by August 31, 2019.
  • Shire plc (SHPG-NASDAQ) cleared its final hurdle in December when shareholders of acquirer Takeda voted to approve Takeda’s $80 billion acquisition of the company. The transaction is closed in January 2019.
  • Express Scripts (ESRX-NASDAQ) received all remaining state regulatory approvals in December and the acquisition by Cigna was subsequently completed on December 21. Express Scripts shareholders received $48.75 cash and 0.2434 shares of Cigna common stock per share of Express Scripts, which valued the transaction at about $70 billion.

In addition some notable deals announced in December included:

  • Tesaro, Inc. (TSRO-NASDAQ), an oncology-focused biopharmaceutical company, agreed to be acquired by British drugmaker GlaxoSmithKline for $75 cash per share, or about $4.5 billion.
  • Belmond Ltd. (BEL-NYSE), an owner and operator of luxury hotels, tourist trains and restaurants, agreed to be acquired by luxury goods group LVMH Moet Hennessy Louis Vuitton for $25 cash per share, or about $4 billion.
  • MINDBODY, Inc. (MB-NASDAQ), a cloud-based business management software and payments platform for the wellness services industry, agreed to be acquired by technology investment firm Vista Equity Partners for $36.50 cash per share, or about $2 billion.

We are excited about our prospects to generate returns uncorrelated to the market in 2019. Historically, periods of market volatility have been fertile ground for merger arbitrage investing, because we are able to purchase shares of target companies at cheaper prices.

Column by Gabelli Funds, written by Michael Gabelli

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

Disclaimer:
The information and any opinions have been obtained from or are based on sources believed to be reliable but accuracy cannot be guaranteed. No responsibility can be accepted for any consequential loss arising from the use of this information. The information is expressed at its date and is issued only to and directed only at those individuals who are permitted to receive such information in accordance with the applicable statutes. In some countries the distribution of this publication may be restricted. It is your responsibility to find out what those restrictions are and observe them.
 
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.

Trade, Treasuries and Trump: Three Keys for Growth in 2019

  |   For  |  0 Comentarios

Trade, Treasuries y Trump: tres claves para el crecimiento en 2019
Pixabay CC0 Public DomainNietjuh . Trade, Treasuries and Trump: Three Keys for Growth in 2019

For most of the last decade we have lived in what has often been termed a “Goldilocks economy.” Much as the fair-haired, home-invading subject of the children’s story found one bowl of porridge to be “just right,” economic growth and inflation have been neither too hot nor too cold1. During this time, coordinated action by the world’s central banks kept interest rates near zero and the prices of nearly all asset classes high. The US economy is in its 113th month of expansion, seven months short of the record. Notwithstanding a recent stumble, US equities are 119 months into the longest-ever bull market, led mostly by growth stocks riding a global wave of technological innovation and expanding prosperity. Except for growth scares in 2011, 2015 and perhaps one day in November 2016, market volatility has been low and its upward trajectory largely uninterrupted. There are signs, however, that the narrative may be changing as a turn in the aging business cycle may be accompanied by a wholesale shift in socio-political regimes from globalism to nationalism and capital to labor. Populism is on the march around the world with long-term effects that are unclear, but unlikely to be positive for equities. As in the story, the bears will eventually return home; their timing and mood is uncertain, as is how much of this eventuality the market has already discounted. Against this backdrop we believe bottom-up, fundamental stock selection of the type we have practiced for over forty years remains more important than ever.

The Political Economy of 2018

The most salient issue for the market is growth – with corporate tax cuts behind us and little slack left in the economy, growth will almost certainly slow from the 3-4% posted in 2018. That does not necessarily imply a recession, defined as two consecutive quarters of contraction, is on the immediate horizon. How far above or below the approximately 2% real growth that population and productivity gains suggest is “just right” depends on many factors including what we have described variously as Three T’s: Trade, Treasuries and Trump.

Trade

President Trump made “fair trade” the centerpiece of his election campaign and he has thus far made good on his promise to challenge the prevailing post-war “free trade” orthodoxy (however illusory that reality might have been). Hope for a trade deal with China rose when the administration renegotiated NAFTA, now called USMCA (the initials of its US, Mexican and Canadian signatories). The market understandably zags with each hint that a China deal could emerge since China accounts for over half of the US’ $600 billion trade deficit and remains our third largest export destination. The situation takes on even greater significance due to China’s role as an engine for global growth. China is slowing as it faces domestic structural imbalances. Pressure from President Trump exacerbates those issues, but a deal is unlikely to solve them or heal the lasting damage done to the Sino-American symbiosis.
 
Treasuries

Also critical to the outlook for the economy and stocks are the level and trajectory of interest rates. Since the Federal Reserve began its taper four years ago in October 2014, the ten-year Treasury rate breached 3% this year for the first time since 2013, standing now just below that level. Higher interest rates have real world impacts – they make the purchases of new homes, cars, capital equipment, companies and the US deficit more expensive to finance. All else equal, higher rates reduce the value of risk assets by making the alternative home for capital, “riskless” Treasuries, more attractive. The term structure of interest rates (aka the yield curve) has also been ascribed predictive powers. Inverted curves – situations in which the ten-year yield exceeds the two-year yield – have predicted all nine recessions since 1955, albeit with two false positives and a wide variation in timing. The virtually flat yield curve today thus worries some observers.

Trump

While there has always been a healthy interplay between markets and political figures, President Trump’s twitter habit, unpredictability and the potential legal challenges to his presidency have made him more “center row orchestra” than past leaders. Among the concerns for the next two years is how a Democratic Congress with no interest in helping Trump get re-elected approves the USMCA, a debt ceiling extension and further fiscal stimulus, especially when the ask may be a tweak to the tax cuts. Interestingly, the War on Tech (i.e. privacy and anti-trust investigations of Facebook, Google, Amazon and others) seems to be one of the few issues with bipartisan support and is worth watching in 2019. Geopolitical disruption is not unique to the US: if and how the UK exits the European Union, the precarious positions of leaders in Germany, France and Italy, not to mention the typical entanglements in the Middle East, also remain a focus.

Skeptics Could Be Wrong If Things Go Right

Not all news – whether real or fake – is bad of course. In fact, many economic indicators are quite strong, with 3.7% unemployment the lowest since the tumult of 1969, record consumer net worth ($109 trillion) and interest rates and inflation that, viewed over a longer time frame, remain quite tame. The Federal Reserve and the President are probably not past the point of no return and still have not lost policy control: President Trump, who possesses a keen sensitivity to the stock market, could resolve the trade war and the Fed could blink on 2019 rate hikes. That would leave reason to believe the expansion could continue and that the current state of the market is the pause, like the previous ones in this cycle, that refreshes. 

Mr. Market
Causation, Correlation or Neither

The S&P 500 is down 6% and the small capitalization Russell 2000 index is down 13% to date, with each off 16% and 24% from the peaks in those indices in September and August, respectively. For most of the year, the performance of the S&P 500, dominated by six technology stocks (Facebook, Amazon, Netflix, Google, Apple and Microsoft – the “FANGMA”) that comprise 15% of its weight, masked the more significant declines posted by a broader group of stocks. Approximately two-thirds of stocks in the S&P 500 are negative this year with one-third down more than 20%. Even the vaunted FANGMA is now 25% off its highs, adding credence to the notion that the global growth trend may be broken. “Buy the Dip” has morphed to “Sell the Rip.”

Market declines of this magnitude could be expected to impart a negative wealth effect, i.e. consumers with slimmer brokerage statements feeling less inclined to make discretionary purchases, which could exacerbate an economic slowdown, but market declines are more often simply a precursor, not a trigger, of recessions. Since 1929, there have been sixteen bear markets with most, though not all, pacing a recession by approximately one year (the recession-less crash of October 1987 a notable exception). It is also worth stating that the market does not equal the economy. Just as some have suggested Wall St. prospered without much of Main St. over the last decade, the reverse could conceivably prove true.

Valuation Today vs. Five Years Out

In any case, stocks are already pricing a slowdown and/or higher rates. A flat year-to-date equity market compared with estimated EPS gains of 22% in 2018 and 8% in 2019, implies a contraction in forward multiples from 18x at the end of 2017 to roughly 15x today. That is at the low end of historical multiples during periods with inflation in the 0-3% area. This suggests that the market as a whole does not appear expensive. We do not buy the “market,” but we are finding a lot of bargains in individual stocks recently.

Deals, Deals & More Deals

Deal activity slowed through the year as political uncertainty weighed, but the underpinnings for mergers (low interest rates and a lack of organic growth opportunities) remain and the potentially waning days of the present administration may encourage activity sooner rather than later. Spin-offs rebounded in 2018 (twenty-six by our count), including two by Honeywell and one pre-takeover spin-off by KLX. Notable upcoming announced separations include Madison Square Garden’s spin of its sports teams, 21st Century Fox’s pre-deal spin of its news and broadcast assets, and three-way spins by DowDuPont and United Technologies. As discussed in the past, we like spin-offs because they not only tend to surface value but often serve as the source of new ideas.

Conclusion

Last year, we expressed surprise that a strong market was overlooking what seemed to be mounting risks late in the economic cycle. As many of those challenges – trade disputes, higher interest rates, political discord – play out, we wonder if the market is now ignoring what continue to be decent corporate fundamentals. Ultimately our job is to do the work on the microeconomic elements of each company and industry we cover, examine how the changing macroeconomic environment impacts those variables and make buy and sell decisions that balance the resulting opportunities and risks. Since the bears inevitably come home in each cycle, we have always erred on the side of capital preservation and that will especially be the case going forward. Children’s stories don’t always have happy endings but they serve as cautionary examples that we have heeded well.

““Goldilocks and the Three Bears” was an old tale first recorded by poet Robert Southey in 1837. Market commentator use of the analogy dates to at least the late-1990s expansion.

 

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

Disclaimer:
The information and any opinions have been obtained from or are based on sources believed to be reliable but accuracy cannot be guaranteed. No responsibility can be accepted for any consequential loss arising from the use of this information. The information is expressed at its date and is issued only to and directed only at those individuals who are permitted to receive such information in accordance with the applicable statutes. In some countries the distribution of this publication may be restricted. It is your responsibility to find out what those restrictions are and observe them.
 
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.
 

 

Looking Back on 2018 and Looking Forward to 2019

  |   For  |  0 Comentarios

El mercado de renta fija en dólares debería empezar a estabilizarse tras un complicado 2018
Pixabay CC0 Public DomainPhoto: leninscape. Looking Back on 2018 and Looking Forward to 2019

2018 has been one of the most difficult years for bonds over the last 10 years. The reasons behind this underperformance are different to those upsetting the financial markets of 2008. At that time, the health of the banking system was at the heart of many concerns. Since then, the banking industry has been streamlined and consolidated. Banks have improved their Capital footprint, reduced their risk profile, and improved their profitability.

The source of today’s financial uncertainty lies elsewhere.

Three predominant factors have weighed on Bond markets in 2018

  1. The reorganization of international trade following trade barriers imposed by the American administration.
  2. Capital flows following the change in monetary policy in the United States.
  3. Geopolitcal events destabilizing Europe and the Emerging World.

As a result, the bonds issued by European names in USD have been adversely affected after having benefited from a strong performance in 2017.

With a continuing discord between the European Union and the UK or Italy for example, European subordinated bonds denominated in USD now provide some of the highest yield returns in the world in this currency (between 7% to 9% per annum) and stand out when compared to those of equivalent sized North American institutions. In a financially interconnected world, this discrepancy does not seem justified to us. In the coming months, we expect investors to reconsider their outlook on the dollar denominated debt of European household names, if only for the step up in yield that these bonds provide.

Outlook 2019

To face uncertain times, it is preferable to remain exposed to financially sound large household names. The USD subordinated instruments of these same issuers provide some of the highest yield returns, in a world of historically low interest rates. 

As bilateral trade agreements are put in place, the current cycle of tariff disputes should progressively come to an end.

It was announced by the Federal Reserve (Fed.) that their interest rate increase cycle, initiated in 2015, would terminate by 2020 at the latest. This should stabilize the USD Fixed Income market moving forward.

The USD Fixed Income market is the largest in the world. Through a dollar denominated portfolio, investors can benefit from the widest investment opportunities available to the subordinated asset class, only through this currency.

For the Fund’s USD and Euro (hedged) tranches, investors can avoid being exposed to monetary changes projected for the Euro Fixed Income investment space.

In Europe, political arrangements look to be on horizon for the Italian Budget and the Brexit process. These issues have plagued the performance of USD European bond assets over the last few months.

Finally, world capital is looking for decent yield returns. The overall supply of subordinated instruments is limited relative to the potentially demand from this global liquidity. World investors have been and still are desperately looking for returns on invested capital.

Column by Ygal Cohen and Steven Groslin, of ASG Capital

Merger Arbitrage Update for November 2018

  |   For  |  0 Comentarios

Actualización sobre arbitraje de M&A para noviembre de 2018
Photo: William Wan . Merger Arbitrage Update for November 2018

Merger arbitrage performance in November was bolstered by deals that received key regulatory approvals, including “green lights” from the Chinese regulatory authority. Specifically:

  • Rockwell Collins (COL-NYSE) and United Technologies received antitrust approval from China’s State Administration for Market Regulation (SAMR) for UTX’s acquisition of Collins. This was the last remaining hurdle for the deal after clearing U.S. antitrust in October. The deal was subsequently completed on November 27 and Collins shareholders received $93.33 cash and 0.37525 shares of United Technologies common stock for each share, or about $30 billion.
  • Aetna, Inc.’s (AET-NYSE) agreement to be acquired by CVS Health received a number of state regulatory approvals in November, culminating with New York Department of Financial Services on November 26. The U.S. DOJ approved the merger in October after the companies agreed to sell Aetna’s Medicare Part D business, the only area in which the two companies competed. The deal closed on November 28, and shareholders of Aetna received $145 cash and 0.8378 shares of CVS common stock for each share, or about $71 billion.
  • Twenty-First Century Fox (FOX-NASDAQ) shares traded higher after Disney received Chinese SAMR approval for its acquisition of Fox. The deal remains subject to Brazilian regulatory approvals which is expected early in the first quarter of 2019. Under terms of the agreement Fox shareholders will receive $38 in cash and Disney shares, as well as one share of New Fox, which will own Fox’s broadcast and cable assets.

 Some new deals announced in November included:

  • ARRIS International (ARRS-NASDAQ), a manufacturer of communications equipment and related products, agreed to be acquired by CommScope Holding for $31.75 cash per share, or about $7 billion. 
  • Athenahealth, Inc. (ATHN-NASDAQ), a provider of cloud-based software used to manage electronic health records and medical practices, agreed to be acquired by a consortium led by Veritas Capital for $135 cash per share, or about $6 billion.
  • BTG plc (BTG LN-London), a medical technology and pharmaceutical licensing company, agreed to be acquired by Boston Scientific for £8.40 cash per share, or about £3.3 billion.

 We continue to find attractive opportunities investing in announced mergers and expect future deal activity will provide further prospects to generate returns uncorrelated to the market.

Column written by Michael Gabelli from Gabelli Funds

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

Disclaimer:
The information and any opinions have been obtained from or are based on sources believed to be reliable but accuracy cannot be guaranteed. No responsibility can be accepted for any consequential loss arising from the use of this information. The information is expressed at its date and is issued only to and directed only at those individuals who are permitted to receive such information in accordance with the applicable statutes. In some countries the distribution of this publication may be restricted. It is your responsibility to find out what those restrictions are and observe them.
 
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.
 

 

The US Dollar Should Weaken As Global Growth Converges Again In 2019

  |   For  |  0 Comentarios

El dólar estadounidense debería irse debilitando a medida que el crecimiento global vaya convergiendo de nuevo en 2019
CC-BY-SA-2.0, Flickr. The US Dollar Should Weaken As Global Growth Converges Again In 2019

The US dollar was a clear winner in 2018 as it was one of the very few assets to register gains. Exceptionally strong US economic growth, political upheavals in Europe and the emerging markets and escalating trade tensions have buoyed the greenback this year.

Softer data in Europe brought on fears of a slowdown in the region and distanced the possibility of seeing a rate hike by the European Central Bank. In Italy, the coalition government of the League and the 5-Star Movement brought forth a budget plan that defied the European Commission and riled investors who feared that an increase in Italian debt would send ripple effects across markets. The pound sterling also weakened against the dollar in the face of the never-ending negotiations to reach a Brexit agreement. Finally, higher interest rates and the trade war between US and China especially affected emerging market currencies, as a more severe slowdown in China would have a direct impact on their economies.

We thought the dollar would weaken in 2018 but we had not foreseen the protracted trade war negotiations nor the outcome of the Italian election. 2018 has been a year of diverging economies, with a striving US on one side and the rest of the world on the other. We think this should change in 2019 as the fiscal stimulus fades in the US and the rest of the world recovers.

The slowdown in Europe was partly due to the normalisation of unsustainable high growth rates in 2017 and temporary factors such as the decline in the auto sector. The implementation of the Worldwide Harmonised Light Vehicles Test Procedure in September may well help to cut carbon emissions, but it also created problems in the production, distribution and storage of vehicles. Nevertheless, Europe is still growing above trend and these temporary factors should dissipate going forward. Furthermore, base effects will become easier and the improvement in the labour market should continue to support domestic demand.

With respect to political risks, Italy cannot go too far in its fiscal deviation as the markets will push yields higher, going against Italy’s own interests. It is precisely for this reason that they have already brought the deficit target down to 2.04%, almost in line with the requirements of the EC. As for the UK, there seems to be a multitude of possible outcomes, including an early general election or even another referendum. But whatever the outcome, eventually the UK will have to reach an agreement as a no-deal Brexit would be too disastrous for its economy.

Regarding emerging markets, we think China will resort to fiscal stimulus policies should the growth rate drop below 6% and, even though the ride could still be rocky, a trade agreement between the US and China should be reached in the best interest of all parties.

Market sentiment towards all these risks is already very negative and a gloomy scenario seems to be priced in. A positive outcome for any one of these issues, therefore, would probably see a downward movement in the dollar. Ultimately, the most important factor for currency movements is the shift in interest rate differentials. The market is only pricing in 40 bp of hikes by the ECB over the next two years, whereas the Fed is nearing the end of its hiking cycle. Consequently, there is ample room for a hawkish surprise on behalf of the ECB.

The main risk to this view is that the dollar may only start to depreciate during the second half of 2019, as political tensions may take time to resolve themselves and the European parliamentary elections in May could prove to be yet another hurdle. 

Column by Jadwiga Kitovitz, CFA, Head of Multi-Asset Management and Institutional Clients of Crèdit Andorrà Group. . Crèdit Andorrà Financial Group Research.

 

Private Equity – Worth the Risk?

  |   For  |  0 Comentarios

Private Equity - Worth the Risk?

Few would have predicted 10 years ago the meteoric rise of private equity. In 2017, US private equity firms raised $621 billion, the most in a decade. However, this ‘wave of liquidity’ has led to concerns that heightened competition for deals is driving up valuations and exerting downward pressure on returns. Given the asset class’s relatively illiquid nature – and factoring in rising interest rates, macroeconomic concerns and the threat of a global trade war – it is therefore reasonable to ask: is private equity worth the risk?   

End of the golden age?

This first thing to say is commentators have been predicting the decline of private equity for the last 25 years or more. And yet, despite a few bumps along the way, the industry has thrived. The current ‘golden age’ of private equity is due to a number of factors. For private equity firms (GPs), low levels of interest rates have made it easier to borrow at lower costs to buyout deals or refinance old deals on better terms. At the same time, fundraising levels have soared as yield-hungry investors – both institutional and retail – have turned to more unconventional sections of the market in search of better returns. And private equity has certainly delivered on that front. According to a study by the Association of Investment Companies, the median annualised return for the past 10 years from private equity was 8.6% (net of fees), outperforming public equity (6.1%), fixed income (5.3%) and total return strategies (5.3%).

But, as we are often told, past performance is not a guide to future returns. So, can private equity continue to deliver this stellar outperformance?

Paying a premium

As we highlighted, private equity fundraising is at its highest in 10 years. This, however, has left global GPs holding around $1.7 trillion of unallocated capital (or ‘dry powder’). With more money at their disposal, managers are under increasing pressure to deploy that capital, leading many to pay a premium to secure their targets. According to consultancy firm Preqin, private equity managers were paying up to 11/12X average EBITDA in 2017, while leveraged deals were 6X EBITDA. These are the highest multiples since the peak in 2007. Elevated prices will naturally affect the returns investors can expect.

Finding value

However, these prices tend to be focused in the upper end of the market, where many large GPs deploy their capital. By contrast, there is much stronger return potential from buying at lesser entry multiples at the lower mid-market. Here, leverage is typically capped below 5X EBITDA and companies have strong debt-to-equity ratios. It also means debt is less of a driver of valuation in this segment.

Additionally, the supply/demand dynamics of companies-to-GPs in the mid-market space is less competitive. According to the Boston Consulting Group, only 17% of midsized US companies ($500 million to $1 billion in annual revenue) are owned by private equity firms. Were US GPs to spend all their ‘dry powder’ ($628 billion at the end of 2017), this would see this increase to only 27%. This means there are numerous attractive companies that can still be acquired for sensible prices.

There are also numerous early-stage opportunities in the tech space. While the so-called ‘unicorns’ – $1billion-plus start-ups such as Air BnB, Uber, Pintrest – continue to garner much of the attention, there are also many early-stage opportunities in Big Data, A.I., automation and the cloud. While not traditionally the realm of GPs, many are tapping into this market through strategic partners, who can nurture growth ahead of a profitable exit further down the line.

Further, GPs are increasingly looking at new and expanding markets. This includes China, where private market returns better reflect the nation’s strong GDP growth than their public market counterparts. Sectors such as consumer, healthcare and services – which all benefit from China’s growing consumption – are rich in private market opportunities. The reduction in China’s capital controls and the opening of its markets are also positive for private equity exits, both in terms of offshore-to-onshore capital inflows, as well as international exits to Chinese purchasers.
So, while valuations are undoubtedly elevated at the upper end of the market, there are still plenty of opportunities elsewhere that should enable GPs to continue to deliver superior returns. 

Watch out for bears

Of course, one cannot ignore the current macroeconomic climate and the headwinds markets are facing. For one thing, major central banks have started to unwind QE and raise interest rates. This includes the Federal Reserve (Fed), which has hiked rates four times over the last year, with four more expected in 2019. However, some have argued that the Fed was too slow to start tightening and will have to hike more aggressively should inflation rise rapidly. The US government’s $1trillion tax cut at a time when the economy is at its strongest in 40 years could certainly manifest itself in rising prices, necessitating the Fed to act.

As for the wider economy, higher rates and inflation fears could also push up costs for consumers and businesses, curtailing spending and business investment. Then there is President Trump and his trade war. The tetchy rhetoric is now translating into real world tariffs, which is hurting business around the world. Geopolitics also remain a factor, notably around the oil price, which is sensitive to any new confabulation. It is these factors that could ultimately lead to a US recession in the next few years.

Bumpy times ahead

As for markets, we are now in the ninth year of bull-market run and the S&P 500 is up 300% since early 2009. However, with central banks tightening policy, this liquidity-fuelled run might not have much further to go. The likelihood of a market reversal increases as we move into 2019, especially given the unpredictable nature of the factors at play.

This would obviously have implications for GPs. Indeed, elevated interest rates could make it potentially difficult for highly leveraged firms to meet their obligations. However, any downtown will also create opportunities for GPs, who can use their huge stockpiles of dormant capital to buy companies at discounted prices. So, perversely, a market slump may prove a boon for many private equity firms.

In the interim, markets are therefore likely to be volatile for the remainder of 2018. This will no doubt impact valuations and the performance of private-equity-backed companies. That said, private equity funds have traditionally performed well in volatile markets because managers focus on long-term value and are able to look through short-term noise and market disruption. In particular, sector-focused funds have also grown in popularity during volatile times, with GPs able to capitalise on favourable trends amid wider macroeconomic concerns.

What are the risks for retail investors?

With large minimum investment thresholds, private equity funds are usually too expensive for the average retail investor. However, investors can access the market through investment trusts. These tend to be ‘fund of funds’ (FoFs), whereby mangers invest in private equity funds (for a management fee) and reap the benefits of the manager’s investment decisions. These FoFs suffered during the financial crisis, but have rebounded strongly, beating the MSCI World index by 560 basis points over the past 20 years. One of the major risks of such investment is that they are long-term in nature – typically 8-10 years – which means retail investors must be prepared to lock their cash away for an extended period of time before making any meaningful returns. 

Final thoughts…

So, while risks exist, there are reasons to believe that private equity will continue to stand the test of time. As we have shown, elevated valuations will no doubt weigh on returns, but there are opportunities in the lower mid-market, tech space, growth capital and geographies like China that will allow GPs to continue to create value. Rising interest rates and the threat of recession also remain to the fore, while the former will no doubt pose challenges for overly leveraged GPs. However, any market downturn will also create opportunities, notably for those that have chosen to keep their powder dry.

Column by Graham McDonald, Global Head of Private Equity, Aberdeen Standard Investments