U.S. stocks surged higher in late November as the pragmatic Fed Chair Powell, in an intriguing speech titled the Federal Reserve’s Framework for Monitoring Financial Stability at the New York Economic Club, hinted at a possible slowdown during 2019 in the Fed’s projected rate hike path when he said, interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy.
Mr. Powell continued, we see no major asset class where valuations appear far in excess of standard benchmarks as some did, for example, in the late 1990s dot-com boom or the pre-crisis credit boom, setting the stage for the best week for stocks in seven years, placing November in the plus column for the month.
That same day, Wednesday November 28, the Wall Street Journal ran a prescient story on the U.S. vs China trade war and the upcoming G20 meeting in Buenos Aries which also caught the stock market’s attention stating, officials from both countries are examining the possibility of delaying higher U.S. tariffs until the spring, and launching new talks about Chinese economic policy.
Using the metric of ‘cumulative equity value and number of deals,’ merger and acquisition activity for 2018 is running about twenty five percent above 2017 levels according to industry sources. M&A totals, using the metric of value, are tracking higher than pre-crisis 2007 levels and using the total number of deals puts 2018 about twenty five percent below 2007 levels. Deals in energy, financials, and technology are standouts compared to these sectors in 2017.
On the research front, the television industry is experiencing a tectonic shift of viewership from linear to on-demand viewing. Vertically integrated behemoths like Netflix and Amazon continue to grow with no end in sight. Despite this, we believe there is a place in the media ecosystem for traditional terrestrial broadcast companies.
In an interesting update since the G20 summit, on an event driven situation we have highlighted previously regarding NXP Semiconductors and Qualcomm, China and the U.S. have recently agreed to return to the negotiating table. Chinese leader Xi Jinping said he is now “open to approving” U.S. chip maker Qualcomm ’s $44 billion acquisition of Dutch chip maker NXP Semiconductors according to the official White House statement. The deal had fallen apart in July because Chinese regulators had sat on it for so long, seemingly ending a takeover saga that dragged on for almost two years. More to come on the subject as the ongoing trade rhetoric continues.
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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