U.S. stocks rebounded in January, a reprieve for investors who endured a challenging 2022. The rally for stocks was driven by investors’ increased confidence that interest rates may be near peak levels. The market is starting to price in the possibility that the Federal Reserve may soon pause rate hikes followed by interest rate cuts in the second half of 2023. As a result, riskier assets have benefitted from the rally, such as growth companies as well as stocks with high short interest. While general market sentiment improved, there is some caution on whether the move represented a real inflection point or yet another bear-market trap.
As January concluded, the market entered the busiest part of the Q4 earnings season. While only a portion of companies have reported thus far, management commentary remains conservative amid the uncertain demand backdrop. Despite lower earnings expectations, the tone of the market seemed to align more with soft-landing expectations than hard-landing scenarios.
On February 1st, the Federal Reserve announced a 25bps rate hike at the end of its two-day policy meeting, citing persistent inflation. This hike now brings the targeted federal funds rate to 4.50-4.75%, up from 0.00-0.25% prior to the initial increase in March 2022. The Fed anticipates that ongoing increases in the target range will be appropriate in order to return inflation to 2% over time. Fed Chair Jerome Powell said that the full effects of interest rate increases had yet to be felt, and that there was still more work to do. The next FOMC meeting is March 21st-22nd.
After almost three years, China reopened its borders on January 8th and ended a requirement for incoming travelers to quarantine, dismantling the last component of its stringent zero-COVID policy. Investors are optimistic that the reopening and recovery of the world’s second-largest economy should help spur a broader economic revival.
Merger arb performance in January was bolstered by deals that made significant progress towards closing. Shaw Communications (SJR/B CN-C$39.60-Toronto) and Rogers Communications were victorious defending their C$25 billion merger against the Canadian Competition Bureau in Canada’s Federal Court of Appeals. The parties now await approval from the Canadian Department of Innovation, Science and Economic Development, the final remaining approval before the deal can close. South Jersey Industries, Sierra Wireless, and Meridian Biosciences each received the final required regulatory approvals and the three deals closed in January. Deals announced in January including Evoqua Water Technologies’ $8 billion acquisition by Xylem, Magnet Forensics’ C$1 billion acquisition by Thoma Bravo, and CinCor Pharma’s $2 billion acquisition by AstraZeneca are creating new opportunities for investment.
Convertibles got off to a strong start in 2023 with the best month for performance since 2020, led by a number have factors, but generally the appetite for risk has increased to begin the year. Additionally, we have seen some of the worst performers from 2022 be the best performers YTD. A few of our fixed income equivalent holdings have benefited from a “credit delta” where an improved perception of a company’s balance sheet and access to capital causes investors to bid up the bonds. The result has been one month returns that many investors were expecting for the entirety of 2023.
We continue to see opportunity in the convertible market this year. The fixed income equivalent issues still offer compelling yields to maturity even after the recent moves. Many of these bonds are the only debt on the balance sheet and have 3 to 4 years until maturity. We expect these bonds to accrete to par over time, building a solid foundation for performance. We have seen some companies address these bonds by buying them back in the open market or by offering an exchange for a new convertible. We anticipate more exchange offers as the year progresses. It is also likely that some convert issuers will be acquisition targets which would make their bonds puttable at par if the acquisition is for cash, or convertible into the acquiring company if shares are used. Either outcome should be desirable to convert owners.
New issuance continued to be anemic this month, but what did come saw significant demand with upsized deals pricing at the rich end of the price talk. We expect companies to use convertibles when raising capital this year to reduce interest expense and extend maturities in a covenant lite structure. We believe many companies have delayed coming to the market and converts offer an attractive way for companies to add low cost capital to their balance sheets. Continued issuance allows us to stay current and we expect to selectively layer new issues into our portfolio to maintain the asymmetrical risk profile we are seeking to achieve.
To access our proprietary value investment methodology, and dedicated merger arbitrage portfolio we offer the following UCITS Funds in each discipline:
GAMCO MERGER ARBITRAGE
GAMCO Merger Arbitrage UCITS Fund, launched in October 2011, is an open-end fund incorporated in Luxembourg and compliant with UCITS regulation. The team, dedicated strategy, and record dates back to 1985. The objective of the GAMCO Merger Arbitrage Fund is to achieve long-term capital growth by investing primarily in announced equity merger and acquisition transactions while maintaining a diversified portfolio. The Fund utilizes a highly specialized investment approach designed principally to profit from the successful completion of proposed mergers, takeovers, tender offers, leveraged buyouts and other types of corporate reorganizations. Analyzes and continuously monitors each pending transaction for potential risk, including: regulatory, terms, financing, and shareholder approval.
Merger investments are a highly liquid, non-market correlated, proven and consistent alternative to traditional fixed income and equity securities. Merger returns are dependent on deal spreads. Deal spreads are a function of time, deal risk premium, and interest rates. Returns are thus correlated to interest rate changes over the medium term and not the broader equity market. The prospect of rising rates would imply higher returns on mergers as spreads widen to compensate arbitrageurs. As bond markets decline (interest rates rise), merger returns should improve as capital allocation decisions adjust to the changes in the costs of capital.
Broad Market volatility can lead to widening of spreads in merger positions, coupled with our well-researched merger portfolios, offer the potential for enhanced IRRs through dynamic position sizing. Daily price volatility fluctuations coupled with less proprietary capital (the Volcker rule) in the U.S. have contributed to improving merger spreads and thus, overall returns. Thus our fund is well positioned as a cash substitute or fixed income alternative.
Our objectives are to compound and preserve wealth over time, while remaining non-correlated to the broad global markets. We created our first dedicated merger fund 32 years ago. Since then, our merger performance has grown client assets at an annualized rate of approximately 10.7% gross and 7.6% net since 1985. Today, we manage assets on behalf of institutional and high net worth clients globally in a variety of fund structures and mandates.
Class I USD – LU0687944552
Class I EUR – LU0687944396
Class A USD – LU0687943745
Class A EUR – LU0687943661
Class R USD – LU1453360825
Class R EUR – LU1453361476
GAMCO ALL CAP VALUE
The GAMCO All Cap Value UCITS Fund launched in May, 2015 utilizes Gabelli’s its proprietary PMV with a Catalyst™ investment methodology, which has been in place since 1977. The Fund seeks absolute returns through event driven value investing. Our methodology centers around fundamental, research-driven, value based investing with a focus on asset values, cash flows and identifiable catalysts to maximize returns independent of market direction. The fund draws on the experience of its global portfolio team and 35+ value research analysts.
GAMCO is an active, bottom-up, value investor, and seeks to achieve real capital appreciation (relative to inflation) over the long term regardless of market cycles. Our value-oriented stock selection process is based on the fundamental investment principles first articulated in 1934 by Graham and Dodd, the founders of modern security analysis, and further augmented by Mario Gabelli in 1977 with his introduction of the concepts of Private Market Value (PMV) with a Catalyst™ into equity analysis. PMV with a Catalyst™ is our unique research methodology that focuses on individual stock selection by identifying firms selling below intrinsic value with a reasonable probability of realizing their PMV’s which we define as the price a strategic or financial acquirer would be willing to pay for the entire enterprise. The fundamental valuation factors utilized to evaluate securities prior to inclusion/exclusion into the portfolio, our research driven approach views fundamental analysis as a three pronged approach: free cash flow (earnings before, interest, taxes, depreciation and amortization, or EBITDA, minus the capital expenditures necessary to grow/maintain the business); earnings per share trends; and private market value (PMV), which encompasses on and off balance sheet assets and liabilities. Our team arrives at a PMV valuation by a rigorous assessment of fundamentals from publicly available information and judgement gained from meeting management, covering all size companies globally and our comprehensive, accumulated knowledge of a variety of sectors. We then identify businesses for the portfolio possessing the proper margin of safety and research variables from our deep research universe.
Class I USD – LU1216601648
Class I EUR – LU1216601564
Class A USD – LU1216600913
Class A EUR – LU1216600673
Class R USD – LU1453359900
Class R EUR – LU1453360155
GAMCO CONVERTIBLE SECURITIES
GAMCO Convertible Securities’ objective is to seek to provide current income as well as long term capital appreciation through a total return strategy by investing in a diversified portfolio of global convertible securities.
The Fund leverages the firm’s history of investing in dedicated convertible security portfolios since 1979.
The fund invests in convertible securities, as well as other instruments that have economic characteristics similar to such securities, across global markets (but the fund will not invest in contingent convertible notes). The fund may invest in securities of any market capitalization or credit quality, including up to 100% in below investment grade or unrated securities, and may from time to time invest a significant amount of its assets in securities of smaller companies. Convertible securities may include any suitable convertible instruments such as convertible bonds, convertible notes or convertible preference shares.
By actively managing the fund and investing in convertible securities, the investment manager seeks the opportunity to participate in the capital appreciation of underlying stocks, while at the same time relying on the fixed income aspect of the convertible securities to provide current income and reduced price volatility, which can limit the risk of loss in a down equity market.
Class I USD LU2264533006
Class I EUR LU2264532966
Class A USD LU2264532701
Class A EUR LU2264532610
Class R USD LU2264533345
Class R EUR LU2264533261
Class F USD LU2264533691
Class F EUR LU2264533428
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.