Fund of the Fortnight: GAM Star GAMCO US Equity
The latest: GAM Star GAMCO US Equity
This fund is not to be confused with GAM Star Technology which we have previously covered in this column. GAM is the UK distributors of both funds but the underlying manager of the GAM Star GAMCO US Equity fund is Mario Gabelli of Gabelli Asset Management (which was itself recently renamed GAMCO).
Mario Gabelli is a veteran of the industry who has been living and breathing US equities for more than 40 years.
His fund aims to deliver long-term appreciation by investing in companies that are undervalued and under-researched, using an investment process which is founded on the principles of value investing pioneers Graham & Dodd.
To achieve this, his well-resourced team of more than 30 analysts compares companies against peers on a global basis, looking for those it believes are significantly undervalued (trade significantly below their ‘Private Market Value’) but with strong management and where there is a catalyst that could trigger a rerating in the next three to five years.
While they are not activist investors, they work hard with leading companies in a global peer group to encourage both mergers and demergers. These are often trigger points to realising value. Other catalysts could be new products, management change, industry consolidation or technological changes.
Gabelli’s team has had particular success in the global consumer brand sector, where the catalyst has often been international consolidation and corporate reconstruction. The sector analyst Kevin Dreyer travels the world meeting management teams behind competing brands.
Examples that demonstrate this “Private Market Value with a Catalyst” TM approach are Cadbury and Jim Beam. In the former, Gabelli was instrumental in behind the scenes manoeuvring of the sale of the UK chocolatier to Kraft of the US in 2009. They held a position in Jim Beam (the US maker of bourbon) as a potential takeover target by Diageo or Pernod Ricard, rivals in the global spirits trade. However in January 2014, a takeover bid for Beam actually came from Suntory Holdings a Japanese drinks company at 25 per cent premium to the pre-bid share price.
The portfolio holds more than 100 holdings which is not normally a style we favour however – we prefer higher conviction portfolios. Gabelli justifies the number of holdings to increase diversity and to minimise volatility. Also with his buy and hold strategy (holding many names for more than five years) he slowly builds up positions in the portfolio, hence the number of smaller positions. Stocks make it into the portfolio not just for their M&A or consolidation plays as described above but also for wealth preservation plays.
This unique approach has done well in different business cycles – times when US companies are demerging divisions and when they are on the acquisitions trail.
The US economy continues to improve and companies are getting more positive on their future. This is encouraging capital expenditure and a rising level of global inter-company transactions including: asset sales, spin offs, liquidations, mergers and acquisitions. A current example (though not in his portfolio) is US company Pfizer’s £58.8bn bid for the UK’s AstraZeneca. Takeover premiums typically run at 20-30 per cent above the market price and are a natural feeding ground for Mario Gabelli and his team at GAMCO.
There have been several successful takeovers within Gabelli’s portfolio and other holdings have reached their target prices prompting him to sell, so that the portfolio is now 22 per cent in cash or cash-equivalents. This high level of cash has persisted for a few months now and we suspect it is a tactical move, as he waits for the US stock market to fall.
While Gabelli is a bottom-up stockpicker, his analysts are guided by thematic views when searching for investments. As an example, he says: “We try to understand the world 10 years from now. We look at the ageing population and how they will need help. Knees, hips, body parts. And then we say, which companies have products and niches and who wants to own them? And then we try to invest in them.”
Gabelli’s approach has done well in different business cycles but as transactions can take some time to work through, this fund is considered more viable for long-term investors.
Simon Moore is research team leader at Bestinvest
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