To Our Shareholders,
For the year ended December 31, 2019, the net asset value (NAV) per class AAA Share of The Gabelli Asset Fund increased 22.4% compared with an increase of 31.5% for the Standard & Poor’s (S&P) 500 Index. Other classes of shares are available. See page 3 for the performance information for all classes.
Enclosed are the financial statements, including the schedule of investments, as of December 31, 2019.
Performance Discussion (Unaudited)
The Fund primarily seeks to provide growth of capital. The Fund’s secondary goal is to provide current income.
The Fund’s investment strategy is to primarily invest in common and preferred stocks. The Fund focuses on companies which appear underpriced relative to their private market value (PMV). PMV is the value the Fund’s investment adviser, Gabelli Funds, LLC, believes informed investors would be willing to pay for a company. Under normal market conditions, the Fund invests at least 80% of its assets in stocks that are listed on a recognized securities exchange or similar market. The portfolio managers will invest in companies that, in the public market, are selling at a significant discount to the portfolio managers’ assessment of their PMV. The portfolio managers consider factors such as price, earnings expectations, earnings and price histories, balance sheet characteristics, and perceived management skills. The portfolio managers also consider changes in economic and political outlooks as well as individual corporate developments.
In absolute terms, 2019 was an excellent year with stocks, corporate bonds, gold and oil all up double digits. This contrasted sharply with 2018 when virtually every asset class declined as a result of a growth scare reminiscent of those in 2011 and 2015. Economic growth in the U.S. indeed slowed but remained above 2%. As it turns out, the 2010s will be the first decade in U.S. history without a recession and home to the longest bull market on record. Life in the political realm has remained more volatile. While Brexit and US trade deals appear on a path to resolution, President Trump faces impeachment and the coming election is sure to keep 2020 interesting.
Much as a blinding snowstorm can give way to a crystalline paradise, the tumult of late 2018 created a wonderland of bargains in the market. In retrospect it appears investors correctly anticipated an economic slowdown that manifested itself primarily in the industrial and materials sectors (key purchasing manager indices spent the last three quarters of 2019 in contraction) and flat corporate earnings in 2019. However, the markets, ever forward looking, rebounded as the so-called Powell and Trump puts were triggered. Federal Reserve Chairman Jerome Powell backtracked on his project to normalize interest rates, cutting rates three times and increasing bond purchases and overnight funding operations. After escalating trade hostilities with China, President Trump showed an increasing willingness to make amends, culminating in Phase One of a deal announced, but not signed, in December. All the while, the American consumer has remained steadfast, supported by the lowest unemployment rate (3.6%) since 1969 and rising household wealth (+3% to $114 trillion). With a recession postponed yet again and interest rates lower, the total return of the S&P 500 exceeded 30% in 2019, propelled almost entirely by an expansion of the average earnings multiple from 15x to 19x. Equity returns in 2019 were by no means smooth. The market recovered its September 2018 highs in April and traded sideways until the late summer. The first nine months of 2019 followed the script of nine of the last ten years. That is, the most expensive stocks outperformed the cheapest stocks, or as popularly formulated, Growth beat Value. However, coinciding with the beginning of a year-end push higher, the second week of September saw an abrupt shift as some of the most adored stocks dramatically lagged the forgotten and forlorn stocks. Although Value ultimately lost again to Growth, it outperformed in fits and starts throughout the fourth quarter.
The top contributors to the Fund’s performance in 2019 included: Ametek, Inc.(AME, Financial) (2.9% of net assets as of December 31, 2019), a diversified supplier of highly engineered equipment used in a broad array of industrial end markets. The company offers a diverse product portfolio including test and measurement, metrology, and precision motion control equipment in addition to specialty materials and aftermarket services. Organic sales growth remained strong in 2019.
Sony Corp. (SNE, Financial) (2.4%), a diversified electronics and entertainment company based in Tokyo, Japan. Sony manufactures the PlayStation videogame consoles and games, operates the Sony/Columbia film studio, and Sony Music entertainment. It also manufactures image sensors, mobile devices, consumer electronics, and mirrorless and professional cameras. It holds majority ownership of Sony Financial Services.
Mastercard (MA, Financial) (1.6%), one of the largest electronic payments processing companies, providing services in more than 210 countries and territories. It continues to capitalize on the strong secular global trend of moving to electronic payments from traditional paper.
Some of our weaker performing stocks during the year were: Telephone and Data Systems (TDS, Financial) (1.0%), which provides comprehensive telecommunications services and products to consumers and businesses across the United States through a portfolio of companies. TDS reported solid revenue but worse than expected earnings per share near the end of the year, driving its stock price down.
Qurate Inc. (QRTEA, Financial) (0.1%), which comprises eight retail brands, including QVC and HSN, and engages customers via television, ecommerce, and print catalogs. The company’s third quarter earnings call reported lower than expected revenue, and negative net margins.
Yakult Honsha (TSE:2267, Financial) (0.3%), which produces fermented milk beverages containing beneficial lactic acid bacteria, and other probiotics. The firm has moved beyond its roots to the fields of pharmaceuticals and cosmetics. Its results for the second fiscal quarter of 2019 (ending September 30, 2019), showed a decrease in sales and operating profit.
Thank you for your investment in The Gabelli Asset Fund.
We appreciate your confidence and trust.
