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Capital & Crisis - How to Get a Seat in 'Gabelli's Kitchen'
Posted by: guruhl (IP Logged)
Date: July 5, 2012 09:57PM
Mutual funds are too often just a kind of financial junk food. Investors get a quick and easy portfolio, habitually stuffed with hundreds of stocks. No wonder their returns are frequently poor.
But there are exceptions.
The folks at Gabelli & Co., led by the stock picking gourmand Mario Gabelli, have cooked up a profitable recipe for serving quality ideas. From January 2006 to the end of 2011, these ideas have returned 210%, versus a negative 5% return for the market overall. There is now a surprisingly easy way to get yourself a seat in Gabelli's exclusive kitchen.
Meet Dan Miller. I've known Dan since 2006. He's been managing Gabelli & Co.'s research business for about eight years now. Six years ago, Gabelli's research team started publishing the Focus Five report. It revealed just their five best ideas, updated every quarter. Sometimes names would carry over. Sometimes not.
"We decided to start publishing this report to draw attention to the quality of our ideas," Dan said. "We thought we had a unique fundamental process where we would estimate a company's private market value." Private market value is what an acquirer would pay to buy the whole business. Wide gaps between stock market value and private market value are what attract team Gabelli.
"We also identify a catalyst," Dan adds. "Not just a catalyst, but a near-term event, which to us meant between three and 12 months." And perhaps most importantly: "We have to speak to management and trust them. We have to understand how they are going to create value for shareholders."
As mentioned, this recipe has delivered excellent results. "The Focus Five report showcased a truly superior research process and team, and our ability to find really good ideas. Our picks as a whole were up even in 2008, for example," Dan noted.
Over time, the Focus Five report got a lot of attention. "We would get phone calls from people asking how they could get a copy of the report," Dan remembers, "and they would sometimes ask for a fund that did this." So Dan convinced Mario to turn the idea into a fund. They converted a tiny small-cap fund that Dan took over in January. The Gabelli Focus Five Fund was born.
"For IRS purposes," Dan continued, "we can't have just five investments. So the fund will have anywhere from 25–35 investments, but up to half of the fund could be in just five investments — if we have a high level of conviction. Today, the top five names are about 35% of the fund. It's really a concentrated, high-conviction, best ideas strategy."
So importantly, the fund is not the report. But the Focus Five Fund grew out of the same process. "We've got 35 analysts that cover various industries," Dan says. "In addition, we've got about a dozen portfolio managers with certain specialties. We all convene every day at 8 a.m. in a firmwide morning meeting. We have a fluid flow of info about ideas. My job is to look at these ideas and determine the high-conviction names. Mario is our best analyst, for example. I talk to him every day. And I can tell you when he likes a stock and when he loves it… and when he really loves it."
Unlike the report, Dan is not beholden to the turn of the calendar marking a new quarter. He has no problem holding an idea for a year or two or longer. "But I'm not buying it and waiting three years for something to happen," he says. "I have to have a near-term event."
Guru Discussed: Mario Gabelli: Current Portfolio, Stock Picks
Stocks Discussed: SPY, DJI, QQQ,
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