What Is GABCX’s Investment Methodology?



GABCX’s investment methodology

The Gabelli ABC Fund – Class AAA (GABCX) uses an event-driven strategy to generate profit at relatively low risk. Also, the fund seeks to limit the excessive risk of capital loss through investment in value-oriented common stocks that trade at a significant discount to their market value in the US stock market (VFINX). The graph below compares the net asset value (or NAV) performance of GABCX with similar strategy alternative funds such as the Arbitrage Event-Driven Fund – Class I (AEDNX) and the Driehaus Event Driven Fund (DEVDX).

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NAV price movement

The GABCX has managed to outperform the AEDNX and the DEVDX since January 2014. The fund also exhibited relatively less volatility in its price movement compared to the other two alternative funds. The one-year returns of GABCX, AEDNX, and DEVDX are 2.1%, -8.5%, and -5.1%, respectively, as of January 13, 2016. The top equity holdings of GABCX include stocks such as PartnerRe (PRE), Altera (ALTR), Dealertrack Technologies (TRAK), and Thoratec (THOR).

Difference between event-driven and merger arbitrage

The “event-driven” strategy seeks to exploit the short-term mispricing when events such as mergers, acquisitions, and restructurings are announced. It is different from the “merger arbitrage” strategy, as it generally takes long (or buy) only positions, whereas merger arbitrage takes long positions in the target company and short positions in the acquiring company.

During corporate stock-to-stock mergers, a merger arbitrageur buys the stock of the target company while shorting the stock of the acquiring company, as the stock price of the target company usually remains somewhere below the acquisition price. A long forward contract means entering a contract to buy a particular asset at a future date with the expectation that the asset will rise in value. A short position is opposite to a long position where the expectation is bearish.

In the next article of the series, we will analyze how GABCX might affect an investment portfolio.


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