Gabelli Asset Management Inc.
Gabelli Asset Management Inc.
Incorporated: 1976 as Gabelli & Co.
Sales: $138.2 million (1998)
Stock Exchanges: New York
Ticker Symbol: GBL
NAIC: 52312 Securities Brokerage; 52393 Investment Advice; 52591 Open-End Investment Funds; 52599 Other Financial Vehicles
Gabelli Asset Management Inc. is a holding company for subsidiaries engaged in managing mutual funds, offering advisory services to investors and alternative investment products such as risk arbitrage and merchant-banking limited partnerships, and providing brokerage, trading, underwriting, and research services. Although the company was managing assets of more than $16 billion at the end of 1998, its chief asset, to many observers, was its boss, the feisty and indefatigable Mario Gabelli. Dubbed “Super Mario” for his awesome record as an investor in stocks, he took Gabelli Asset Management public in 1999 but continued to hold a majority stake in the enterprise.
The son of Italian immigrants, Gabelli was born and raised in New York City’s borough of The Bronx. He won a scholarship to Fordham University, where he studied accounting and graduated summa cum laude in 1965 but was unable to land a job as a security analyst. Gabelli emerged with a master’s degree from Columbia University’s Graduate School of Business two years later and went to work for Loeb, Rhodes & Co., where, he later told a Forbes reporter, he discovered, “Major moves in the stocks of big companies come once in ten years. So if you want to find stocks that can move a long way, you have to seek out pockets of opportunity. You learn that the greatest gains come from investing in small and medium-sized companies.”
Gabelli was putting into practice the theory of value investing that he learned at Columbia. He rated companies not by earnings but cash flow, analyzing a firm in great detail to calculate what he called private-market value: not the share price at which a stock was selling on an exchange but the price per share someone would be willing to pay in order to buy the whole company. This method would be widely used in the 1980s in leveraged buyouts, in which a public company’s managers would buy their company, or at least a considerable part of it, and take it private. The calculations employed were often not the same as the standard valuation measures for public companies.
A Decade of Value Investing: 1976–86
At Loeb, Rhodes, Gabelli researched the farm equipment and auto parts industries and, later, media and broadcasting properties, sectors in which he would continue to specialize. But he left the firm in 1975, he said, when it turned down his idea of publishing a portfolio of small, undervalued stocks. He joined a smaller, research-oriented firm but ran into the same problem and quit in 1976 to form the brokerage house Gabelli & Co. with borrowed funds and money he had accumulated from trading on his own account. By the end of that year he also had formed Gabelli Investors (later Gamco Investors Inc.) to manage money for clients. After sending a memo to a Barron’s editor touting a company he fancied, Chris-Craft Industries, Inc., Gabelli landed on the cover of this financial weekly. By 1981 Gamco had 81 accounts and was managing about $33 million.
Despite the rocky economy and overall stagnant stock market of the late 1970s and early 1980s, Gabelli made money for his clients each year. Gabelli & Co. in 1977 was a dealer-broker specializing in the shares of companies neglected by the big investment houses because the capitalization of these companies was so small that they could not take a large position without distorting the market for these securities. Gabelli noted that some of these firms had price/earnings ratios of only five, four, and even three to one. Applying the philosophy of value investing, Gabelli found, on investigation, unrecognized worth in such still ignored assets as cellular phone licenses.
While some investors were seeking to get in on the ground floor of a corporation’s growth, Gabelli preferred to cash in on a company’s “death.” During the next few years he invested in or recommended the stocks of more than 50 companies that were taken over by other firms or privatized in leveraged buyouts, enabling him to earn an average annual compounded rate of return of more than 35 percent for his clients. By 1985 he was managing $350 million, two-thirds of it in tax-exempt funds. He stayed fully invested at all times, even when the overall market seemed to be overvalued, focusing on industries in which he was highly knowledgeable, such as broadcasting and auto parts distribution. “I don’t need a rising market to bail me out,” he told Jeffrey M. Landerman of Business Week in 1984.
Gabelli’s firm was doing all its own research, usually with the idea of identifying firms that might be candidates for leveraged buyouts: those with characteristics such as a large amount of cash on hand, underlying assets such as real estate, or a large block of stock in the hands of a company founder with no children. He also looked for companies in industries where new competition was difficult and cash flow was high. Once Gabelli selected such a stock, he was willing to wait for years until it appreciated. He began buying Cowles Communications, Inc., for example, in 1977 at $14 a share and eventually became its biggest stockholder. In 1984 the company (now Cowles Media Co.) was privatized at $46 a share, for a total payoff to Gabelli’s clients of $33 million. Another media winner was Chris-Craft, whose BHC Communications, Inc. achieved almost a sixfold pretax gain in income over six years in the 1980s and in the 1990s assembled its own network, United Television.
The relentless Gabelli was visiting about 50 companies a year to gain information and meeting the managers of more than 100 other corporations annually, as well as getting together with other portfolio managers to discuss ideas and reading about 20 trade journals, two or three newspapers, and a number of industry and company reports. He also was writing research reports for his brokerage customers and portfolio-manager and other professional-investor clients. “I read annual reports instead of novels,” Gabelli told Jerry Edgerton of Money in 1986. As a narrowly focused investor with large holdings in a few companies, he was able to bring influence to bear on company management.
Gabelli’s special interest in broadcasting companies took him into cable television in the late 1970s. When cable companies became interested in cellular telephones, he was quick to spot the trend. By the mid-1980s he was investing in some of the 1,400 independent telephone companies in the United States. But he was also a major investor in unglamorous purveyors of basic industrial products—not only auto parts distributors but such companies as SPS Technologies, a producer of industrial fasteners; Greif Bros. Corp., a manufacturer of shipping containers; and Lamson & Sessions Co., a producer of thermoplastic electric-conduit fittings for the construction industry.
Between 1978 and 1985 Gabelli’s portfolios outperformed the Standard & Poor’s index of 500 stocks each year and more than doubled the results of this S&P index in five of those years. Between 1977 and 1988 Gamco Investors’ assets appreciated at an annual compounded rate of 28 percent, a rate exceeded by very few money managers. This money management entity had never lost money over a year and had met Gabelli’s objective of ten percent annual return after taxes and inflation in all but two years. Gamco Investors’ equity assets, flush with cash invested by company pension funds, reached $1.6 billion in the latter year.
Gabelli Mutual Funds: 1986–97
In addition to brokerage and money management operations, Gabelli in 1986 established his first investment vehicle for the general public, Gabelli Asset Fund. This mutual fund required a minimum investment of $25,000, but only $2,000 for Individual Retirement Accounts (IRAs). By the end of 1988 Gabelli’s firm had three mutual funds—two run by Gabelli himself—with combined assets of $650 million. In all, Gabelli Group Inc. (later Gabelli Funds, Inc.)—the parent firm for Gamco Investors and Gabelli & Co.—had $2.5 billion under management from 700 client accounts. Gabelli owned 62 percent of the company. By early 1991 Gabelli Group was overseeing 1,000 institutional and individual accounts, five mutual funds, an arbitrage fund, and several other U.S. and offshore investment partnerships. However, during a disastrous 1990 Gamco’s accounts lost 14.1 percent, and three of the four open-end mutual funds lost value, partly because of the fall in share value of telephone companies Gabelli had been touting.
Gabelli Funds, Inc. is best known for its research-driven, value-oriented equity investing experience which is based on the principles of Graham & Dodd —that is, investing in undervalued companies that have a high probability of achieving their intrinsic or private value over time. The overall philosophy is based on a bottom-up approach to stock selection. While Gabelli is known for its value oriented investment strategy, the Company has developed a diversified product mix, especially among the Gabelli Funds, to serve the financial objectives of a broad spectrum of investors.
Founded in 1987, Gabelli Growth Fund was first managed by Elizabeth Bramwell, an analyst Gabelli met at Columbia during their student days. Gabelli Growth Fund achieved an annualized return of about 40 percent in 1988 and 1989, better than her boss’s own performance. She resigned in 1994 after finding herself locked out of her office for refusing to move from Manhattan to suburban Rye, New York, where corporate headquarters had been established two years earlier. Bramwell said the performance of her fund had slipped vis-à-vis Gabelli’s own results partly because she was not being allotted the staff she needed as the fund grew in size. She won $850,000 from Gabelli in an arbitration award regarding compensation allegedly due her.
By this time Gabelli was personally managing seven of the company’s 11 mutual funds, with a total of $2.65 billion in assets. He also held an interest in Gabelli-O’Connor, a fixed-income management firm that distributed a small fund family called Westwood, and he controlled Lynch Corp., a publicly held diversified manufacturing holding company in which Gabelli & Co. and Gamco Investors held about one quarter of the shares. In 1994 the Securities and Exchange Commission cited the latter two firms for failing to “establish, maintain and enforce written policies and procedures reasonably designed to prevent the misuse” of inside information stemming from Gabelli’s dual position as an investment adviser and as chief executive of Lynch Corp. Gabelli & Co. and Gamco Investors paid $100,000 in civil penalties and agreed to appoint an independent consultant to review the procedures of the two firms and recommend improvements. The SEC did not charge Gabelli or anyone in his employ with actually trading on any inside information that Gabelli might have obtained through his service at Lynch.
In October 1995 the Wall Street Journal published an article suggesting that Mario Gabelli’s disinclination to delegate authority was resulting in turmoil within his organization, and that while the Gabelli funds were still achieving impressive long-terms results, year-by-year gains were no longer spectacular. The article noted that all seven mutual funds managed by Gabelli himself were performing more poorly in 1995 than the average similar fund, and that all were below the S&P 500 index for the year.
Mario Gabelli refurbished his reputation in 1997, when ten Gabelli equity funds averaged a return of 31.7 percent, the best of any U.S. mutual fund group, earning him the accolade of domestic equity fund manager of the year by Morning star Inc. These funds included Gabelli Global Interactive Couch Potato, which specialized in entertainment and media stocks and whose lead manager was Gabelli’s son Marc. In May 1998 this fund held third position among all funds concentrating on communications companies, with a return of 54 percent in the previous 12 months.
Gabelli Asset Management: 1998–99
By 1998 Gabelli & Co. was a subsidiary of Gabelli Securities, Inc., which was 77 percent owned by the holding company Gabelli Asset Management Inc. In its corporate quarters, Gabelli Asset Management retained its founder’s reputation for tightfisted management, with overhead kept to a minimum and a staff so minimal that it did not even include a receptionist. The company earned net income of $57.3 million on revenues of $138.2 million in 1998. It was managing $16.3 billion—of which 88 percent was invested in equities—at the end of 1998 and went public in February 1999, selling six million shares, or about 20 percent of the common stock, at $17.50 a share. Gabelli and other family members continued to control the company and held 97.6 percent of the voting power, partly through ownership of separate Class B shares.
Much of the approximately $96 million in proceeds from the sale of the shares was earmarked to expand and market the offerings of the firm, make acquisitions, and hire talented managers. But Gabelli Asset Management also agreed to pay its founder, in addition to the usual portfolio management fees—averaging more than $20 million annually in recent years—ten percent of the aggregate pretax profits of the firm and a deferred payment of $50 million on January 2, 2002, plus quarterly interest beforehand of $750,000 on that sum. Originally, Gabelli had sought to continue collecting 20 percent of his firm’s annual pretax profits. He received a total of $33.6 million in compensation in 1997 and about $42.3 million in 1998.
Not all Wall Street observers thought purchasing Gabelli Asset Management stock a wise investment, despite the founder’s spectacular record as a money manager. A Morning-star executive told Richard A. Oppel, Jr., of the New York Times that the firm had the potential for strong growth but a history of “wacky promotional schemes” and management “like a cottage industry.” A fund industry consultant put the firm’s potential weakness more concisely when he said “The company is Mario.”
Gabelli Asset Management announced in April 1999 that three of its funds, including “Couch Potato,” would henceforth be sold through brokers collecting sales charges, or “loads,” as well as directly to investors as “no-loads.” Company officials were reported to be gathering data on whether the firm should continue selling its funds directly or exclusively through brokers.
Gabelli Funds, at the end of 1998, was managing 26 mutual funds with $8.2 billion in assets, including three closed-end funds on the New York Stock Exchange. It was managing 975 separate accounts for clients, including corporate pension and profit-sharing plans, endowments, jointly trusteed plans, municipalities, and high net worth individuals, with a total of $8 billion under management, and was serving as subadviser to certain other third-party investment funds. Gabelli Securities, Inc. was providing alternative investment products, consisting primarily of risk arbitrage and merchant banking limited partnerships with $146 million of assets. Gabelli & Co. was a registered broker-dealer and was acting as underwriter and distributor of open-end mutual funds. It was also providing research services. Gabelli Asset Management had offices in New York City and Reno, Nevada, as well as corporate headquarters in Rye, New York.
Gabelli Advisers, Inc. (41%); Gabelli Fixed Income, Inc. (including 80%-owned Gabelli Fixed Income, LLC); Gabelli Funds, LLC; Gabelli Securities, Inc. (77%, including Gabelli & Co.); GAMCO Investors, Inc.
Authers, John, “Gabelli’s Theory Catches the Mood,” Financial Times, August 20, 1998, p. 22.
Button, Graham, “In the Boss’ Shadow,” Forbes, November 27, 1989, pp. 238, 240.
Eaton, Leslie, “From Wall St. Guru to Mutual-Fund Empire Builder,” New York Times, July 16, 1995, Sec. 3, pp. 1, 7.
Franecki, David, “Some Gabelli Funds to Add Sales Charges,” Wall Street Journal, April 1, 1999, p. C23.
Gould, Carole, “Keeping It All in the Gabelli Family,” New York Times, May 24, 1998, Sec. 3, p. 7.
Henriques, Diana B., “An S.E.C. Warning to Funds on Inside Information Rules,” New York Times, December 9, 1994, pp. DI, D6.
“Mario Gabelli’s Orphan Asylum,” Forbes, July 15, 1977, pp. 69–70, 72, 74.
McGough, Robert, “Bramwell Opts to Leave Gabelli Funds Rather Than Relocate New York Office,” Wall Street Journal, February 11, 1994, p. B3.
Oppel, Richard A., Jr., “Market Place,” New York Times, February 10, 1999, p. C8.
Rohrer, Julie, “Cashing in at the Wake,” Institutional Investor, January 1985, pp. 67–68, 71.
________, “What Makes Mario Run?” Institutional Investor, pp. 94–98, 101, 103–104.
Schultz, Ellen E., and McGough, Robert, “Gabelli Returns Slip Amid Series of Distractions,” Wall Street Journal, October 6, 1995, pp. C1, C23.
White, James A., “‘Super Mario’ Is Weathering First Setback for His Empire,” Wall Street Journal, February 15, 1991, pp. C1, C5.
Wyatt, Edward, “Market Place,” New York Times, April 28, 1998, p. D9.