The U.S. stock market closed higher for June and the second quarter. Rising volatility, part of what we call Wall Street’s ‘Old Normal’, reflected uncertainty over the eventual outcome of the aggressive trade actions taken by the Trump administration aimed at lowering the protectionist barriers of other countries. A relatively strong economy continues to position U.S. equities in the global sweet spot versus non-US stocks. The Fed is signaling higher rates ahead and this is keeping the dollar strong, emerging markets weak, and inflation in focus. Migration related political risks in Germany are stress testing European unity.
Second quarter earnings reports will start soon and are expected to rise in line with first quarter gains and to fuel deals, capex, dividends and share buybacks. Allocation of capital and financial engineering driven by strategic decisions made by company boards and managements continues to be an area of focus and opportunity for short and long term catalysts we have identified in the businesses we have researched as sound long term investments.
Global merger and acquisition activity set a record high in the first half of 2018 as the value of announced deals spiked to a new high of $2.5 trillion year to date, an increase of 61% compared to the first half of 2017. Cross-border deal making had its best quarter since 2007, totaling $1 trillion in the first half, or 41% of total M&A. Media company deals featuring Twenty-First Century Fox led the charge across the global headlines while deal making in the Energy and Power sector reached an all-time high in the first half of 2018.
One positive development during the second quarter for M&A occurred on June 12th when U.S. District Court Judge Richard Leon issued his decision which denied the Department of Justice’s request to block AT&T’s acquisition of Time Warner. Judge Leon put no conditions on the deal and said the government failed to make its case the merger would lead to higher prices for the consumer. The DOJ’s chose not to seek a stay preventing the merger from closing on appeal, and the deal was subsequently completed on June 15. After Time Warner withstood the government challenge, spreads on other outstanding vertical mergers firmed in response, including CVS’s acquisition of Aetna (AET-NYSE) for $70 billion and Cigna’s acquisition of Express Scripts (ESRX-NASDAQ) for $65 billion.
Research and investment areas that are of high interest for us include the U.S. Pet Population, Live Entertainment, Defense, and Equipment Rental. We continue to analyze major demographic trends in the growing world population. U.S. millennial and baby boomer preferences are of high interest. However, Generation Z is comprised of 1.9 billion people born between 1995 and 2009 and is a larger group than the Millennials born between 1980 and 1994. By 2020, Gen Z consumers are projected by Booz Co to represent about forty percent of the markets in the U.S., Europe, China, India, Russia and Brazil. There will be lots of fundamental investment dynamics ahead and rising deal activity.
In conclusion, the U.S. economy remains upbeat and as always, we are watching world economic and political developments as they may impact financial markets and opportunities.
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
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