As every month, Gabelli provides investors a fresh overview of what has happened in the markets the previous month. In November’s outlook, Gabelli’s experts pay attention to three main topics.
Value
U.S. equities rallied sharply in November, posting its biggest monthly gain since 1987. Prospects for improved economic growth have been supported by progress on vaccines, expectations for more government fiscal stimulus, and a continued U.S. Federal Reserve accommodative monetary policy.
The greatest tailwind for U.S. stock was the upbeat news regarding coronavirus vaccines. Pfizer (PFE) and BioNTech (BNTX) disclosed that an initial analysis of a late-stage study showed their coronavirus vaccine candidate was more than 90% effective, while follow-up data put the efficacy rate at 95%. Shortly after, Moderna (MRNA) and AstraZeneca (AZN) also reported positive news with effective rates that also exceeded 90%. Despite the renewed spike COVID-19 cases, investors remain focused on the distribution and short-term availability of the vaccine.
Former Vice President Biden defeated President Trump in the U.S. Presidential election while the widely previewed “blue wave” failed to come to fruition as Republicans narrowed the Democrats’ majority in the House of Representatives and appear to be in a position to retain control of the Senate. The idea of a split Congress suggests minimal changes in tax and regulatory policies in the near future.
The removal of election uncertainty may have helped put more focus back on a statistically strong Q3 earnings season. As Value Investors, we will continue to use the current market volatility as an opportunity to buy attractive companies, which have positive free cash flows, healthy balance sheets and are trading at discounted prices.
Merger Arbitrage
Mergers and acquisitions activity remained robust in November with $388 billion of deals announced, an increase of 18% over November 2019 levels. Through the end of November, global deal activity totaled $3.2 trillion, down only 11% from 2019 activity.
December is off to a fast start with salesforce.com acquiring Slack Technologies for cash and stock totaling $26 billion, and consolidation of asset managers continued with Macquarie agreeing to acquire Waddell & Reed Financial in an all-cash deal valued at $1.6 billion.
We are finding investment opportunities in newly announced deals attractive, and continue to add to existing positions in our portfolio. Our absolute return investments also positively impacted performance in November. More specifically, HD Supply Holdings (HDS-$55.78-NASDAQ), a distributor of industrial products for maintenance, repair & operations, and other infrastructure applications, agreed to be acquired by The Home Depot for $56 cash per share, or about $8 billion. Home Depot previously sold its HD Supply business to private equity in 2007, and was taken public in 2013.
Convertible Securities
Global converts have outperformed as their asymmetric exposure to stocks and high concentration of tech, software, and other “stay-at-home” names proved to be valuable benefits amid the high volatility post-lockdown backdrop.
As of today, the global convertibles market has expanded more than 35% in 2020 to over $460bn, its largest size since fall 2008.
The portfolio management team is keenly focused on what the “reopening” may suggest about a cyclical rotation within the CB space, which currently has a heavy concentration of tech and growth names, We believe that in 2021 equities will grind higher while volatility remains supported amid the economic recovery, we are of the belief that the momentum in CBs will persist and that unprecedented monetary easing will continue to encourage aggressive behavior in risk assets. We think converts will once again prove valuable in this environment as they allow investors to own the upside cautiously with the benefit of asymmetric exposure.
We think the macro backdrop will remain broadly supportive of CB issuance in the near-term given stocks are close to highs, market volatility is still elevated, credit spreads remain wide versus pre-COVID levels, and investor appetite for new deals is strong. We have seen the pace of High Yield issuance picking up versus CBs in the second half of 2020 as spreads trended tighter. Nonetheless, we are confident CBs will still be relatively attractive to borrowers despite the decline of their explicit cost savings as they allow for easier and speedier access to capital markets than HY bonds
November proved to be a volatile month as investors weighed the US presidential election and rising COVID cases in both Europe and the US. Outright global CBs excelled as the ICE BofA Global Convertibles G300 (VG00) added more than 9.8% on a local currency basis last month, outperforming all other global asset classes and bringing its year-to-date total return to +25.8%. (see chart below)
US Converts posted their best monthly returns in November (+13.5%) and the U.S. convertibles market size finally breached the previous peak (in May 2008) to reach $373.8bn in market value.
Recent economic data may be suggesting that inflation has begun to rebound from its post-COVID lows, and inflationary concerns have begun to manifest in the prices of various assets, including gold and TIPS but our analysis of both convertible bond floors and cross-asset performance suggests that CBs are much less negatively impacted by rising inflation as traditional fixed income assets.
Column by Gabelli Funds, written by Michael Gabelli
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To access our proprietary value investment methodology, and dedicated merger arbitrage portfolio we offer the following UCITS Funds in each discipline:
GAMCO MERGER ARBITRAGE
GAMCO Merger Arbitrage UCITS Fund, launched in October 2011, is an open-end fund incorporated in Luxembourg and compliant with UCITS regulation. The team, dedicated strategy, and record dates back to 1985. The objective of the GAMCO Merger Arbitrage Fund is to achieve long-term capital growth by investing primarily in announced equity merger and acquisition transactions while maintaining a diversified portfolio. The Fund utilizes a highly specialized investment approach designed principally to profit from the successful completion of proposed mergers, takeovers, tender offers, leveraged buyouts and other types of corporate reorganizations. Analyzes and continuously monitors each pending transaction for potential risk, including: regulatory, terms, financing, and shareholder approval.
Merger investments are a highly liquid, non-market correlated, proven and consistent alternative to traditional fixed income and equity securities. Merger returns are dependent on deal spreads. Deal spreads are a function of time, deal risk premium, and interest rates. Returns are thus correlated to interest rate changes over the medium term and not the broader equity market. The prospect of rising rates would imply higher returns on mergers as spreads widen to compensate arbitrageurs. As bond markets decline (interest rates rise), merger returns should improve as capital allocation decisions adjust to the changes in the costs of capital.
Broad Market volatility can lead to widening of spreads in merger positions, coupled with our well-researched merger portfolios, offer the potential for enhanced IRRs through dynamic position sizing. Daily price volatility fluctuations coupled with less proprietary capital (the Volcker rule) in the U.S. have contributed to improving merger spreads and thus, overall returns. Thus our fund is well positioned as a cash substitute or fixed income alternative.
Our objectives are to compound and preserve wealth over time, while remaining non-correlated to the broad global markets. We created our first dedicated merger fund 32 years ago. Since then, our merger performance has grown client assets at an annualized rate of approximately 10.7% gross and 7.6% net since 1985. Today, we manage assets on behalf of institutional and high net worth clients globally in a variety of fund structures and mandates.
Class I USD – LU0687944552
Class I EUR – LU0687944396
Class A USD – LU0687943745
Class A EUR – LU0687943661
Class R USD – LU1453360825
Class R EUR – LU1453361476
GAMCO ALL CAP VALUE
The GAMCO All Cap Value UCITS Fund launched in May, 2015 utilizes Gabelli’s its proprietary PMV with a Catalyst™ investment methodology, which has been in place since 1977. The Fund seeks absolute returns through event driven value investing. Our methodology centers around fundamental, research-driven, value based investing with a focus on asset values, cash flows and identifiable catalysts to maximize returns independent of market direction. The fund draws on the experience of its global portfolio team and 35+ value research analysts.
GAMCO is an active, bottom-up, value investor, and seeks to achieve real capital appreciation (relative to inflation) over the long term regardless of market cycles. Our value-oriented stock selection process is based on the fundamental investment principles first articulated in 1934 by Graham and Dodd, the founders of modern security analysis, and further augmented by Mario Gabelli in 1977 with his introduction of the concepts of Private Market Value (PMV) with a Catalyst™ into equity analysis. PMV with a Catalyst™ is our unique research methodology that focuses on individual stock selection by identifying firms selling below intrinsic value with a reasonable probability of realizing their PMV’s which we define as the price a strategic or financial acquirer would be willing to pay for the entire enterprise. The fundamental valuation factors utilized to evaluate securities prior to inclusion/exclusion into the portfolio, our research driven approach views fundamental analysis as a three pronged approach: free cash flow (earnings before, interest, taxes, depreciation and amortization, or EBITDA, minus the capital expenditures necessary to grow/maintain the business); earnings per share trends; and private market value (PMV), which encompasses on and off balance sheet assets and liabilities. Our team arrives at a PMV valuation by a rigorous assessment of fundamentals from publicly available information and judgement gained from meeting management, covering all size companies globally and our comprehensive, accumulated knowledge of a variety of sectors. We then identify businesses for the portfolio possessing the proper margin of safety and research variables from our deep research universe.
Class I USD – LU1216601648
Class I EUR – LU1216601564
Class A USD – LU1216600913
Class A EUR – LU1216600673
Class R USD – LU1453359900
Class R EUR – LU1453360155
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