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In 2001, Mario J. Gabelli created the Gabelli Enterprise Mergers and Acquisitions Fund, a unique, open-end fund that invests in small, mid., and large capitalization equity securities of companies that are believed to be acquisition targets within the coming 12 to 18 months. In addition, assets may be used to engage in merger arbitrage transactions. This involves investing in equity shares of companies that are already engaged in publicly announced mergers, takeovers, tender offers, leveraged buyouts, spin-offs, liquidations, and other corporate reorganizations. The portfolio’s primary objective is capital appreciation.

Mario J. Gabelli

Mr. Gabelli, the portfolio manager, is a leading proponent of the Graham-Dodd approach to security analysis, which focuses on value-oriented investing. Although this paradigm has taken many forms since its development in Security Analysis, a 1934 text authored by professors Benjamin Graham and David Dodd, it generally involves buying equity securities that appear to be underpriced relative to their intrinsic value by using some form of fundamental analysis. As examples, these securities may trade at significant discounts to tangible book value, have low price/earnings multiples, etc.

Mr. Gabelli has had much success implementing value-oriented strategies over the years, as witnessed by the explosive growth of Gabelli Asset Management Company (GAMCO) investors’ assets under his management. For this particular fund, Mr. Gabelli utilizes various investment strategies, although the main focus is on investing in equity securities that are expected to trade at a significant discount to the assessment of their private market value. (Private market value is defined as the value that informed investors would be willing to pay to acquire the entire company.) The strategy of seeking out companies that are perceived as undervalued dovetails nicely with the mergers and acquisitions theme of the fund, since it could be argued that it is more likely that so-called undervalued companies will be acquired than those that are believed to be overpriced.

Class AAA shares

In February, 2010, GAMCO launched a no-load, AAA share class for Gabelli Enterprise Mergers and Acquisition’s Fund (EAAAX), in addition to the load and institutional classes that were already available. (No-load shares are issued directly by the fund, without a commission or surcharge.) Although it was never specified, we surmise that the AAA class was created to make it easier for the public to invest in the fund, and, in turn, increase the assets in the fund. Mr. Gabelli thinks we are entering the fifth wave of M&A activity in the post World War II era, and believes there is considerable opportunity for merger and acquisition investors. He argues that domestic corporations have more cash on their ledgers than at any time in history, and notes that despite the prolonged rally that began in March, 2009, the stocks of many companies are still at depressed levels relative to their 2007 highs. Mr. Gabelli further reasons that many American corporations are currently finding it cheaper to “buy than build”, in order to become more productive and competitive in the marketplace and to realize higher levels of profitability. He finishes by pointing out business leaders and corporate executives have already begun seeking out strategic acquisitions to help achieve corporate goals. Therefore, he anticipates M&A activity will increase markedly in the years ahead, thus bringing tremendous opportunity for those with the insight and willingness to be proactive.

Conclusion

Mario Gabelli is one of the most respected names in the investment game, with a portfolio of funds catering to essentially every investor regardless of his/her situation and goals. The Gabelli Enterprise Mergers and Acquisitions Fund has not been a world beater to date (having a load-adjusted return of just over 3.2% since inception), and is probably a bit too speculative for most accounts. However, the newest share class may well pique the interest of aggressive investors with a long-term bent who share Mr. Gabelli’s forward-looking investment premise regarding future merger and acquisition trends.