Mario Gabelli's Gabelli Asset Fund 2nd-Quarter Shareholder Commentary

To Our Shareholders,

For the quarter ended June 30, 2020, the net asset value (NAV) per Class AAA Share of The Gabelli Asset Fund increased 17.5% compared with an increase of 20.5% for the Standard & Poor's (S&P) 500 Index. Other classes of shares are available. See page 2 for additional performance information for all classes.

Introduction: 2020 Visibility Limited?

Extraordinary times require renewed focus on what we and all fundamental investors practice in some form or another: the estimation of the value of a security based upon a forecast of its future cash flows. Such an exercise requires views on the size and growth of a company's addressable market, its strategic position within that market and the level and direction of interest rates, inflation and taxation, among other things. The explosion of COVID-19 in early 2020 clouded and had the potential to drastically reshuffle those variables, resulting in a 34% peak-to-trough market retrenchment in February and March 2020.

COVID-19 has triggered a peculiar recession, one largely caused or worsened by – and that may ultimately be resolved by – government intervention. Officially dated to February 2020, the current recession has been swift, with April unemployment of 14.7% quickly exceeding the Great Recession peak of 10.6% in January 2010. After declining 5% in Q1, second quarter GDP declined 33%, the sharpest falloff on record. This recession may turn out, however, to be shorter than the 18-month average duration, with the shape of the recovery – V, U, L, W, and even just a Swoosh are some of the often-cited images – influenced by the trajectory of the virus. Economic indicators have already evidenced a rebound, but that could stall with local breakouts of COVID-19. Corporate earnings in 2020 will be poor but largely behind us as we look forward to easier comparisons in 2021.

We'll forego the armchair epidemiology and distill the many outstanding questions about COVID-19 into one: when do we reach the point of indifference? That is, when will the average consumer feel comfortable eating inside a restaurant, getting on an airplane, or going to a sporting event, whether because of a vaccine, herd immunity, an effective treatment or simply quarantine fatigue. We don't know when that point will be, and it almost certainly won't be a discrete date. Rather, it will be a process, already playing out, of living with some uncertainty while resuming economic activity. Sometime in early 2021 seems a reasonable estimate of that point of indifference; it may be sooner or later, but the short-term impact of COVID-19 on our society and economy will wane and unprecedented global fiscal and monetary stimulus should adequately cushion the downside. With the S&P 500 Index posting its best second quarter since 1938 with a 21% rise, that is the judgement the market as a whole appears to be making.

The Political Economy of COVID-19

A more interesting question is whether and how COVID-19 and its attendant responses impact the long term outlook for equities. At a minimum, COVID-19 appears to have accelerated three trends that have been building for a decade or more:

Digitization – As lockdown has forced sometimes reluctant consumers, businesses and governments to change their habits, the way we shop, work, learn and recreate have been changed forever. The adoption curve for many technologies has been pulled forward and new markets have been expanded and created (e.g., connectivity, e-commerce, payment systems) to support "distanced" activities. Winning and losing companies and sectors are already being sorted.

De-globalization – Travel bans have joined trade barriers as the newest incarnation of beggar-thy-neighbor policies. A drive toward self-sufficiency, in at least critical supplies, and tighter control of population movements, will likely be lasting effects of COVID-19. Condemnation of China's initial handling of the virus appears to be one of the few bipartisan issues remaining and will further accentuate the new Cold War.

Disunity – A popular view holds that the fraying of America's social fabric, abetted by globalization, rising income inequality and growing cultural divisions, led to the election of Donald Trump. Many of those same issues, on display in protests not seen since the 1960s, may carry him out of office in November. This year's election (spoiler alert: the focus of our Q3 missive) will surely be contentious, and a flip of the White House and Senate could have important policy ramifications. But those may be details when compared with the existential threat capitalism faces today. A large population not "bought in" to the present system is difficult to discount into current stocks prices but an eventuality that needs to be considered.

Notwithstanding these overarching issues, life after COVID-19 is likely to be more the same than different than life before COVID-19 (BC). Incremental fiscal stimulus under the $2 trillion CARES Act and an accommodative Federal Reserve pave the way for higher taxes and the best chance at a return to inflation in many years no matter who holds the White House. Normally these dynamics would result in lower future real economic growth and thus lower market multiples. That is decidedly not the case with the S&P 500 trading at 19x 2021E earnings even before a potential corporate tax increase. Among the solutions to this puzzle are an expectation that consumer spending will outweigh any drag from the crowding out of more debt and taxes or that, in a zero rate environment, there are no good alternatives to stocks. "Don't fight the Fed" has been a maxim well heeded over the last market cycle.

Mr. Market

A Rip Van Winkle who only checks the market semi-annually might be excused for thinking nothing was amiss this year. Through June 30, the S&P 500 was off a mere 3%, having rallied almost 40% from its March low. Growth stocks continued their winning streak, powered by Facebook, Amazon, Netflix, Google/Alphabet, Microsoft and Apple (the "FANGMA"). At mid-year, these six stocks had an aggregate market capitalization of $6.3 trillion, comprising 23% of the S&P 500 Index and contributing 5.4 points of positive year-to-date return. In some ways, the leadership of these stocks is not surprising as most possess exceptional balance sheets and offer services even more in demand under lockdown. Unlike the bellwethers of the 1990s technology bubble and certain technology "story" stocks today, the FANGMA offer real cash flow that underpins their nation-state status. In an uncertain low growth/low interest rate environment, this growth profile commands a premium. How these stocks perform in a full blown economic recovery and how large they can get, especially when under increasing government scrutiny, remains a question.

A preview of what recovery may ultimately bring for stocks occurred briefly in late May/early June when smaller capitalization and value stocks snatched market leadership before reversing (the Russell 2000 and Russell 3000 Value, which track smaller cap and value stocks, respectively, remained down 14% and 17% at June 30). Historically value, which includes a disproportionate number of cyclically sensitive firms, and small cap have led performance early in the economic cycle. These stocks may have jumped the gun in early June, but in many cases remain at bargain valuations that could provide significant upside as clarity on the shape of recovery increases.

Investment Scorecard

The Fund's largest position, Ametek (3.0% of net assets as of June 30, 2020, +29%), was also its largest contributor to second quarter returns as a slowdown in manufacturing may not be as deep or long as feared. Swedish Match (2.8%, +30%) continued to deliver strong and reliable results as it expands distribution of Zyn nicotine patches globally. S&P Global (1.6%, +41%) is riding a record wave of debt issuance (rated by S&P) to higher profits. Like many media companies, ViacomCBS (0.9%, +45%) rebounded as the advertising environment sequentially improved, subscription revenue moderated overall declines and aggressive cost measures are being pursued. Mastercard (1.8%, +30%) and Paypal (0.6%, +90%), proxies for the resumption of consumer spending, are also benefitting from an accelerated shift to electronic payments. Finally, Newmont Mining (1.7%, +33%) continued higher on the back of gold prices that are rising with expectations for inflation fed by fiscal and monetary stimulus.

There were few meaningful detractors in Q2. Travel woes negatively impacted several aerospace suppliers including engine maker Rolls-Royce (0.2%, -7%). DISH Network spin-off Echostar Corp. (0.1%, -8%) declined owing to concerns that it would lose share to emerging satellite broadband companies, including SpaceX and Amazon. Finally, Wells Fargo (0.5%, -2%) lost ground as it will have to contend not only with lower interest rates but limits on growth imposed by its regulator in response to past fraudulent sales practices.

Conclusion

As individuals we prefer to walk the sunny side of the street; as securities analysts we look down before we look up on those strolls. With the consequences of COVID-19 still unfolding, there is likely to be more pain in an uneven recovery, but we leave open the possibility that recovery will be faster than even the market appears to be discounting. While it is difficult to discern any silver linings in the present crisis, it has at times underscored the centrality of caring for one another and highlighted the adaptability of many enterprises large and small. Ultimately, there has been a widespread display of organic entrepreneurship that built this country and leaves us optimistic for America's future and its ability to grow wealth for all, including through patient, disciplined investment.

Let's Talk Stocks

The following are stock specifics on selected holdings of our Fund. Favorable earnings prospects do not necessarily translate into higher stock prices, but they do express a positive trend that we believe will develop over time. Individual securities mentioned are not necessarily representative of the entire portfolio. For the following holdings, the share prices are listed first in United States dollars (USD) and second in the local currency, where applicable, and are presented as of September 30, 2019.

AMETEK (AME, Financial) (3.0% of net assets as of June 30, 2020) (AME – $89.37 – NYSE) is 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. While total revenue declined 7% year-over-year in Q1 2020, AMETEK's medical, healthcare, and defense businesses (which collectively account for approximately $1.0 billion of sales, or 20% of total revenue) have remained resilient and are expected to record positive organic growth for full-year 2020. AMETEK finished March 2020 with $1.3 billion of cash and another $550 million of availability on its revolver that the company can deploy on attractive acquisition opportunities in the current environment.

ConAgra Brands, Inc. (CAG, Financial) (0.8%) (CAG – $35.17 – NYSE) headquartered in Chicago, Illinois, is a manufacturer and marketer of food products with brands including Healthy Choice meals, Hebrew National hot dogs, Orville Redenbacher's popcorn, PAM cooking spray, Reddi-whip and Slim Jim. The company has undergone tremendous change since CEO Sean Connolly, formerly of Hillshire, took over in 2015 as it sold non-core businesses and acquired Pinnacle Foods in October 2018. ConAgra is focusing on better innovation and marketing, especially in on-trend health and wellness areas including plant-based products utilizing its Birds Eye and Gardein brands. ConAgra is expected to generate an incremental $120 million of synergies over the next two years from the Pinnacle acquisition, which will contribute to the company achieving its financial objectives of: 1%-2% net organic sales growth, 18%-19% adjusted operating margins and earnings of $2.66-$2.76 per share for the fiscal year ending May 2022.

Diageo plc (DEO, Financial) (1.6%) (DEO – $134.39 – NYSE) is the leading global producer of alcoholic beverages, with brands including Smirnoff, Johnny Walker, Ketel One, Captain Morgan, Crown Royal, J&B, Baileys, Tanqueray, and Guinness. The company has a balanced geographic presence in both mature and emerging markets, and it benefits from the trend of consumers around the world trading up to premium products. Over the past several years, Diageo made acquisitions that enhanced its presence in emerging markets: a majority stake in United Spirits, the leading spirits producer in India; Mey Icki, the leading spirits company in Turkey; Shui Jing Fang, a leading Chinese baiju producer; Ypioca, the leading cachaca producer in Brazil; and an increased stake in Halico, the leading domestic spirits producer in Vietnam. While economic conditions in emerging markets have created headwinds for some of these investments recently, the long term fundamentals of the spirits industry remain very favorable, and Diageo will be one of the largest beneficiaries of industry growth.

Johnson & Johnson (JNJ, Financial) (0.3%) (JNJ – $140.63 – NYSE) is the world's largest and most diversified healthcare company, which is helping it to weather the COVID-19 crisis better than most of its peers. The company's pharmaceutical business is one of the fastest growing in the industry, driven by multiple essential oncology and anti-inflammatory products. The consumer division has recovered from several years of manufacturing and quality problems, with a recovery in the over-the-counter medicine business being partially offset by COVID-19 related weakness in skin and beauty products. Johnson & Johnson's medical device business is recovering quickly from the March halt in non-emergency surgeries and should post double digit growth next year as they work through the backlog of deferred procedures. Johnson & Johnson has the management team and the strong balance sheet to emerge from the current crisis in a stronger position than ever before.

Mondelēz International Inc. (MDLZ, Financial) (0.5%) (MDLZ – $51.13 – NASDAQ),headquartered in Deerfield, Illinois, is the renamed Kraft Foods Inc. following the tax-free spin-off to shareholders of the North American grocery business on October 1, 2012. On July 2, 2015 Mondelez combined its coffee business with D.E Master Blenders 1753 to form a new coffee company, Jacobs Douwe Egberts, which completed its public offering in May 2020. Previously, MDLZ exchanged part of its stake in this coffee joint venture for ownership in Keurig Green Mountain, which was acquired by an investor group led by JAB Holding Co. in March 2016 and combined with Dr. Pepper Snapple Group in 2018. Today, the majority of the portfolio, nearly 90% of its $26 billion of revenue, is derived from snacking and includes leading brands such as Oreo, LU and Ritz biscuits, Trident gum, and Cadbury and Milka chocolates. The company continues to execute against its plan to accelerate revenue growth, which may include complementary acquisitions, while also steadily monetizing its coffee assets.

Newmont Corporation (NEM, Financial) (1.7%) (NEM – $61.74 – NYSE) based in Denver, Colorado, is the largest gold mining company in the world. Founded in 1921 and publicly traded since 1925, NEM is the only gold company included in the S&P 500 Index and Fortune 500. Newmont consummated a $10 billion stock for stock merger with Goldcorp in April of 2019 in which it acquired eight high quality gold mines in the Americas. We expect Newmont to produce approximately 6.5 million ounces of gold in 2020 at all-in sustaining costs of $950 per ounce. Post its acquisition of Goldcorp, Newmont is working towards turning around Goldcorp's former underperforming assets and establishing a large, low-cost, well capitalized gold mining business which generates free cash flow at almost any gold price and has the capacity to grow production organically. As such, the company is in the process of cementing its position as the premier gold investment vehicle in the world.

Republic Services Inc. (RSG, Financial) (1.6%) (RSG – $82.05 – NYSE), based in Phoenix, Arizona, became the second largest solid waste company in North America after its acquisition of Allied Waste Industries in December 2008. Republic provides nonhazardous solid waste collection services for commercial, industrial, municipal, and residential customers in forty-one states and Puerto Rico. Republic serves more than 2,800 municipalities and operates 189 landfills, 212 transfer stations, 340 collection operations, and 79 recycling facilities. Since the Allied merger, Republic has benefited from synergies driven by route density, beneficial use of acquired assets, and reduction in redundant corporate overhead. Republic is committed to its core solid waste business. While other providers have strayed into alternative waste resource technologies and strategies, we view Republic's plan to remain steadfast in the traditional solid waste business positively. We expect continued solid waste growth acquisitions, earnings improvement, and incremental route density and internalization growth in already established markets to generate real value in the near to medium term, highlighting the company's potential.

Sony Corp. (SNE, Financial) (2.6%) (SNE – $69.13 – NYSE) is a conglomerate based in Tokyo, Japan focusing on direct-to-consumer entertainment products supported by the company's technology. Sony is the #1 integrated global gaming company and we expect the gaming segment to contribute nearly half of EBITDA (ex-financial) in 2020 following the much anticipated launch of the PlayStation 5, in the 2020 holiday season. Sony Music Recording commands #2 and Music Publishing #1 global share and is a hidden asset as music values have increased with the success of streaming .Sony also operates the Sony/Columbia film studio, which is well positioned in the OTT streaming wars as a major supplier of high quality library shows like Seinfeld. It is an image sensor leader with over 50% global revenue share and is the dominant supplier to Apple iPhone. Sony's Electronics business is a globally diversified cash cow. It acquired the public minority that it do not own to take 100% control of Sony Financial Services. Sony has net cash on its balance sheet which enables the company to manage through COVID-19 and increase its dividend return and introduce a third stock buy back. Online game usage has increased dramatically with stay-at-home restrictions but businesses such as movies are impacted by production stopping and releases delayed.

August 21, 2020

Note: The views expressed in this Shareholder Commentary reflect those of the Portfolio Managers only through the end of the period stated in this Shareholder Commentary. The Portfolio Managers' views are subject to change at any time based on market and other conditions. The information in this Portfolio Managers' Shareholder Commentary represents the opinions of the individual Portfolio Managers and is not intended to be a forecast of future events, a guarantee of future results, or investment advice. Views expressed are those of the Portfolio Managers and may differ from those of other portfolio managers or of the Firm as a whole. This Shareholder Commentary does not constitute an offer of any transaction in any securities. Any recommendation contained herein may not be suitable for all investors. Information contained in this Shareholder Commentary has been obtained from sources we believe to be reliable, but cannot be guaranteed.