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Gabelli Focus Five Fund (GWSVX) was introduced to the market in early 2012. However, it isn’t technically a new fund, it a renamed version of Gabelli Woodland Small Cap Value Fund. That said, its investment approach is very different than it once was and shareholders need to take notice. Whether or not the change is for the better depends on both a shareholder’s perspective and on performance.

As Gabelli Focus Five Fund’s old name implies, the fund used to invest in small cap companies. It can now invest in any market cap size the management team of Dan Miller, Beth Lilly, and Sarah Donnelly like. This is material, but not nearly as material as the change from being a diversified offering to a non-diversified one. The fund’s changed goals now allow for the investment of 50% of total assets into just five stocks. That’s the potential to have 10% of assets in each of just five companies, which would be very large positions by any measure.

Such focus could work out very well if a stock performs as expected and goes up materially. That said, having half of one’s eggs in just five stocks could turn ugly if a stock doesn’t perform well. The idea for the new direction of the fund is based off of an annual report that the Gabelli company published between January 2006 and November 2011 called Gabelli Focus Five. So while the new approach comes with new risks, this change was not made on a whim nor was it made without some history behind it. This should help to alleviate at least a portion of the trepidation that an investor might have, though it shouldn’t remove all concern.

Management “believe[s] this focus on high conviction ideas will allow us to distinguish our performance over a long period of time from a more widely diversified fund.” Still, the overall portfolio is expected to contain between 25 and 35 investments, so the 50% of the fund not in the “high conviction” ideas will provide something of a balance.

Investment ideas will come from Gabelli’s team of industry analysts, so that the fund’s managers hope to opportunistically invest in those businesses that it believes offer the largest margin of safety and that best fit Gabelli’s valuation methodology. On this front, the managers seek to invest in businesses that are trading at discounts of greater than 30% from what they believe the company is worth and that possess potential catalyst that they believe will narrow that gap. Catalysts can include the sale of an asset or division, a financial restructuring, or a change in management or regulatory dynamics, among other things.

A couple of companies that recently held prominent positions in the fund were The Brink’s Company (BCO, its largest holding as of June 30, 2012) and Snyder’s Lance (LNCE, a top-10 holding). Note that neither was given the full 10% weighting that is allowed by the fund’s altered investment approach, which should be comforting in that the managers aren’t “throwing caution to the wind.”

The managers believed the material sell off in Brink’s shares after the company reported earnings in early February was an overreaction to the company’s decision to make a $31.5 million pension contribution with its stock rather than cash. Looking at the long-term potential of the company’s position in less developed markets, highly regarded brand name, and a new CEO that appears to be focused on growth, the trio believed the shares of this secure logistics company were wroth closer to $45 a piece.

Snack food manufacturer Snyder’s Lance, meanwhile, was purchased because the managers didn’t believe that the market was properly valuing the synergies from the company’s 2010 merger (when Snyder’s of Hanover and Lance, Inc. become a single entity). The expectation for this snack food company is earnings per share grow above 20%, annualized, over the next five years, which the managers believe translates into a private market value per share in the mid-to-high $30s.

The AAA shares, which are no-load, require a minimum initial investment of $1,000. The expense ratio, however, is quite high, recently topping 2%. This may change now that the fund has completed its transformation, but it is definitely something to watch. There isn’t enough time to properly assess the fund’s new investment approach, however investors looking to invest in Gabelli’s “best ideas” would do well to consider this offering. Investors who have owned this fund through the change in its investment approach should take the time to consider if this is the type of fund that fits well in their portfolios.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.