To Our Shareholders,
Enclosed are the financial statements, including the schedule of investments, as of December 31, 2019.For the year ended December 31, 2019, the net asset value (NAV) per Class A Share of The Gabelli Value 25 Fund Inc. increased 17.8% compared with increases of 31.5% and 25.3% for the Standard & Poor’s (S&P) 500 Index and the Dow Jones Industrial Average, respectively. Other classes of shares are available. See page 4 for performance information for all classes of shares.
Performance Discussion (Unaudited)
The investment objective of the Fund is to provide long term capital appreciation. The Fund’s investment strategy is to invest primarily in equity securities of companies that Gabelli Funds, LLC (the Adviser) believes are undervalued and have the potential to achieve significant capital appreciation, overweighting its core 25 equity positions. The Adviser invests in companies whose securities are selling at a significant discount to their private market value (PMV). PMV is the value the Adviser believes informed investors would be willing to pay to acquire the entire company. If investor attention is focused on the underlying asset value of a company due to expected or actual developments or other catalysts, an investment opportunity to realize this PMV may exist. The Fund may invest in companies of any size and from time to time may invest a greater portion in companies with large, medium, or small market capitalizations.
In selecting investments, the Adviser also considers the market price of the issuer’s securities, its balance sheet characteristics and the perceived strength of its management. The Fund’s assets will be invested primarily in common stock. Many of the common stocks the Fund will buy will not pay dividends. These stocks will be bought for the potential that their prices will increase, providing capital appreciation for the Fund. The value of equity securities will fluctuate due to many factors, including the past and predicted earnings of the issuer, the quality of the issuer’s management, general market conditions, and the forecasts for the issuer’s industry and the value of the issuer’s assets.
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 US indeed slowed but remained above 2%. As it turns out, the 2010s will be the first decade in US 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, 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.
Among the better performing stocks for the fiscal year were: Sony Corp. (SNE, Financial) (7.3% of net assets as of December 31, 2019), 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.
Swedish Match AB (OSTO:SWMA, Financial) (4.8%), which manufactures snus, moist snuff, nicotine pouches without tobacco, pouch products with neither nicotine nor tobacco, cigars, chewing tobacco, chew bags, matches and lighters at 13 facilities; in Sweden, the US, the Dominican Republic, the Netherlands, the Philippines, Brazil and Denmark. The company reported increasing sales and operating profits, particularly from its ZYN product; cigars and U.S. chewing tobacco also showed increases.
Newmont Goldcorp (NEM, Financial) (4.8%) mines gold, copper, and silver, with a global presence that covers North and South America, Africa, and Australia. The company declared commercial production for three projects, and its board approved moving its Tanami Expansion 2 project into the execution phase.
Our weaker performers included AMC Networks Inc. (AMCX, Financial) (0.9%), which owns and operates cable television networks including the eponymous AMC, BBC America, IFC, and SundanceTV. Its year to date numbers for September 30 showed only a small increase in revenues, and a decrease in operating income.
MSG Networks Inc. (MSGN, Financial) (0.8%) owns and operates two regional sports and entertainment networks broadcasting exclusive live local games from New York and New Jersey based professional sports teams, among other sporting events. The company’s September 30 quarterly results showed a decrease in revenue, operating income, and net income.
U.S. Cellular Corp. (USM, Financial) (0.5%) is a provider of wireless service and products. The company’s third quarter results revealed a slight increase in revenues but sharp drops in diluted earnings and earnings per share, as it continued its network modernization efforts to prepare its network for 5G.
Thank you for your investment in The Gabelli Value 25 Fund.
We appreciate your confidence and trust.
