1

Asset Classes:

Column by Gabelli Funds

Despite the Uncertainty About U.S. Trade Policy, Equity Markets Continue to Rally

Photo: Pxhere CC0
By Michael Gabelli

U.S. equities closed August with a solid gain and set a record high even as the ongoing multi-front trade war’s ripple effects spread to include more products and industries in the EU, China, Canada and Mexico. NAFTA talks are active. Investors were encouraged by strong economic and booming corporate profit data fuelled by the new lower tax rate.  Second quarter after tax earnings grew at the highest rate in six years and GDP grew at a 4.2 percent annualized rate. The bull market that started on March 9, 2009 is now the longest post World War II bull move on record since there has been no 20 percent or more decline. August ended with many questions about U.S. trade policy still unanswered. If left unresolved this may weigh on stocks as specific profit dynamics erode.

The economic implications of the historically flat U.S. Treasury yield curve have become a focus of debate. The Fed is undeterred and continues to raise rates which is keeping the dollar up, emerging markets down, and inflation in focus. In the UK and Europe, Brexit and the Italian budget deficit are two way catalysts.

Agricultural products have been center stage as soybean exports and imports with China have gotten worldwide attention. The U.S. dollar has gained year to date against the major emerging market currencies while U.S. stocks have remained in the global performance sweet spot versus lagging non-US markets.

In the U.S. blue vs red political arena, mid-term elections will be held on Tues Nov 6, 2018.  The pundits expect a split Congress, with Democratic control in the House and a Republican controlled Senate. President Trump is the wildcard catalyst so the outcome may be the unexpected as was the case in November 2016 when financial market volatility spiked, will history repeat itself?

In the ongoing deal arena, British TV group Sky PLC is the target of an intense bidding war among Comcast, Disney and 21st Century Fox and the U.K. Takeover Panel is the referee of this complex heavy weight match. More background around two deals in the telecom and media space:

  • Sky plc (SKY LN-London), the European telecommunications provider and broadcaster, continued to be the subject of a bidding war between Disney (through its pending acquisition of Twenty-First Century Fox) and Comcast. On July 11, Disney boosted its bid for Sky to £14.00 cash per share, and hours later Comcast increased its bid to £14.75 cash per share, which values Sky at £33 billion. Shareholders approved Disney’s acquisition of Fox at a meeting of shareholders on July 27 after fending off an unsolicited bid from Comcast. The approval means that Disney will also acquire Fox’s 39% ownership of Sky which puts it in an advantageous position to increase its bid.
  • Tribune Media Company (TRCO-NYSE) suffered a setback after the FCC designated its proposed acquisition by Sinclair Broadcasting to an administrative law judge (ALJ.) Despite signs that the DOJ was close to approving the transaction on antitrust grounds, the FCC said it objected to the proposed buyers of the stations the company had agreed to divest. It appeared unlikely the FCC would approve the deal, and it was subsequently terminated on August 9. We remain constructive on shares of Tribune. The company has valuable assets including real estate, and a 35% stake in Food Network and recently received a favorable court ruling on the UHF discount. We believe there are a number of opportunities to surface value. With broadcaster Nexstar and private equity firms circling the company, Tribune is widely expected to put itself up for sale again in September. Tribune shares are trading near $37 in August.

Stay tuned…

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.
 

0 Comments

Add new comment